An acquisition is a business transaction that occurs when one company purchases and gains control over another company. These transactions are a core part of mergers and acquisitions (M&A), a career path in corporate law or finance that focuses on the buying, selling, and consolidation of companies.
In this guide, we’ll cover:
- What Is a Business Acquisition?
- Types of Acquisitions
- Pros and Cons of Acquisitions
- Acquisition vs. Merger
- Related M&A Skills
What Is a Business Acquisition?
A business acquisition occurs when one company (the acquirer) buys most or all shares in another company (the target) to assume control of its assets and operations.
Acquisitions are often amicable, meaning both companies are on-board with and negotiate the terms of the transaction. However, the word “acquisition” is sometimes used interchangeably with “takeover,” which can be hostile. In other words, one company might wrest control of — or acquire — another company by buying a majority stake against the wishes of the target company’s board of directors or management.
Acquisitions are often coordinated by investment bankers or lawyers. Large companies, including private equity firms, often have internal teams that manage the process.
Types of Acquisitions
Companies consolidate for a variety of reasons and in a number of ways. The most common types of acquisitions include:
Horizontal Acquisition
A horizontal acquisition occurs when a company buys another company that offers similar products or services. So, for instance, if one streaming network were to purchase another streaming network, that would be considered a horizontal acquisition.
Real-world examples include:
- Facebook purchasing Instagram for $1 billion in 2012
- Verizon Wireless purchasing British telecommunications company Vodafone for $130 billion in cash and stock in 2013
- Marriott International forming the world’s largest hotel chain upon acquiring Starwood Hotels and Resorts Worldwide for $13 billion in 2016
Vertical Acquisition
A vertical acquisition occurs when a company buys another company that produces a product in its existing supply chain. So, for instance, if a streaming network purchases a film or television production company, that would be considered a vertical acquisition.
Real-world examples include:
- Swedish furniture company Ikea continually buying acres of forest
- CVS Health Corporation’s 2018 $69 billion purchase of Aetna
- Online retail giant Amazon purchasing grocer Whole Foods Market for $13.7 billion in 2017
Congeneric Acquisition
A congeneric acquisition occurs when one company buys another company that offers different products or services, but caters to the same customer base. So if a streaming network were to buy a smart television manufacturer, that would be considered a congeneric acquisition.
Real-world examples include:
- Consumer goods giant Procter & Gamble Co. purchasing razor-and-battery company Gillette for $57 billion in 2005
- Coca-cola buying Glaceau, the maker of Vitaminwater, for $4.1 billion in 2007
Conglomerate Acquisition
A conglomerate acquisition occurs when one company buys another company from a completely separate industry. So if a streaming network buys a crayon company, that would be considered a conglomerate acquisition.
Real-world examples include:
- Microsoft acquiring professional networking site LinkedIn for $26.2 billion in 2016
- Multinational holding firm Berkshire Hathaway buying Heinz for $23.3 billion in 2013
Pros and Cons of Acquisitions
There are many reasons why a company might decide to acquire another company — or to allow another company to acquire it. Understanding these reasons, along with the potential drawbacks of an acquisition, are important if you’re interested in pursuing a career in M&A.
Pros
- They can increase market share. Acquisitions are often one of the quickest ways to enter a new market. Say you’re a grocery company with stores on the East Coast and want to expand to West Coast metros. You could consider acquiring a grocery chain that has stores in your desired locations. Alternately, you could offer a new product to juice sales by acquiring a company that already manufactures that product.
- They can lower costs. Acquisitions help companies reach economies of scale — cost reductions that occur when production increases. While complex, you can effectively think of this economics concept as the business equivalent of buying in bulk.
- They reduce or eliminate competition. If our fictional streaming network, for instance, were to buy another streaming network, they would acquire (and, by extension, no longer have to compete for) its customers.
Cons
- They take time. While potentially a way to accelerate growth, acquisitions are still complex legal arrangements, subject to internal and external negotiations, investigations, audits, and reviews. They can take months or, even, a few years to complete.
- They cost money. The acquirer has to pay for the target company in cash, stock, and/or borrowed funds (known as a leveraged buyout). There are also legal fees and tax implications associated with each deal. (Get familiar with the legal side of M&A with the Latham & Watkins Mergers and Acquisitions Virtual Experience Program.)
- They can be mispriced. While M&A professionals rely on a variety of business valuation methods, it still can be tricky to pinpoint how much exactly a company is worth. Valuations, after all, are subject to market and economic conditions outside a business’ control. Given that inherent volatility, there’s generally at least some risk associated with each transaction.
Practice identifying target companies and valuing businesses with the following Forage courses:
Acquisition vs. Merger
The term acquisition is also sometimes used synonymously with merger, but both words technically have different meanings. In an acquisition, the two companies continue to function as separate legal entities.
A merger, conversely, occurs when two existing companies combine to form a new legal entity. Think Exxon and Mobil coming together to form ExxonMobil back in 1999 or Price Waterhouse merging with Coopers and Lybrand to form PricewaterhouseCoopers (PwC) in 1998.
Related M&A Skills
Many M&A professionals often work at investment banks. They research and analyze financial data to understand how a potential acquisition (or merger) would impact a company from the “buy” or the “sell” side. In order to do so, they rely on the following hard skills:
- Identifying potential target companies using comparable company analysis
- Calculating Price-to-Earnings Ratio (P/E Ratio), a measure of how much a company is worth
- Projecting future cash flows using a discounted cash flow (DCF) valuation
- Conducting due diligence before entering into a formal agreement with any seller
Learn these and other core finance skills with Forage’s Investment Banking Skills passport.
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