A business acquisition is a process in which one company purchases the shares and assets of another company in order to take control of it; it is essentially the practice of one company buying another. In general terms, when a company purchases more than 50% of another company’s stock it allows the buyer to take control of decision-making at the target company. This means that the buyer can decide about the disposition of the newly acquired assets without having to seek the approval of other shareholders of the company.
These acquisitions, sometimes also called takeovers or mergers, are common in business and can occur with a target company’s approval (friendly takeover) or against the wishes of their management or shareholders (hostile takeover). A merger refers to two companies of a similar size coming together where neither is taking over the other in terms of being larger or smaller in the deal. In general the term acquisition describes an amicable transaction, where both firms agree on the deal and cooperate; a takeover implies the target company opposes its purchase; and the term merger is used when both companies mutually agree to create a completely new entity when they come together. Each business acquisition is unique, however, and has its own specific circumstances and reasons for the transaction so these terms can overlap.
Business acquisitions are not uncommon and are undertaken for a range of reasons; a company may acquire another because they seek economies of scale, to diversify into other markets, want greater market share, want to be more efficient or they want to acquire intellectual property or other assets from a target company.
An acquisition can be undertaken, for example, when a company wants to operate in another country but does not want to undertake the potentially long and complex process of establishing itself. The purchased business will already have a brand, infrastructure, employee and established market so that the purchaser can begin operations there quickly.
Business acquisitions are most often undertaken to rationalize a market where there is oversupply or high competition; that is with the goal to reduce capacity, eliminate smaller competitors and achieve economies of scale and use the more efficient production methods. It is most often used as a growth strategy to overcome physical and logistical issues that would otherwise hinder expansion – it is usually more cost effective to acquire other companies than expand (since this is costly) and the purchaser also gains the revenue stream of the target company.
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