Navigating through the world of acquisitions can be difficult. There are a lot of terms and concepts which need to be understood. In this article, I am going to cut through all of this jargon to help you get to grips with the basic concepts within the acquisition process. We will unpack what an acquisition is, the types of acquisition there are, and finally, the reasons behind those acquisitions.
Let’s get to it.
What is an Acquisition?
Mergers and Acquisitions are common terms in the business world and are often discussed together. However, there are differences between these two terms, and these differences play out in the real world. To understand what an acquisition is, it is helpful to separate it from the term merger.
What is a Merger?
A merger involves the combination of two businesses. They are brought together for mutual benefit. When this is done, both companies amalgamate to create a new entity. This includes all assets, branding, and stock. In some instances, however, companies may maintain their corporate identities and legal structures.
Mergers are usually friendly. This means that both parties, whether shareholders or board members, agree with the combination for mutual benefit. They are also usually carried out between companies of a similar size.
How is an Acquisition Different from a Merger?
While a merger involves the combination of businesses, an acquisition is when one business or individual buys another company. Usually, this involves purchasing more than 50% of existing shares. This often results in the buying business subsuming the target and absorbing all assets, products, and intellectual properties.
When an acquisition is carried out with shareholder approval but not the approval of the current board, this is a hostile process. Often, this is referred to as a hostile takeover. During a friendly acquisition, the buying company usually agrees a no-shop clause. This is a legal agreement not to sell the company or its assets to a third party for an agreed duration.
Whether friendly or hostile, an acquisition usually takes place between a larger company (buyer) and a smaller business (the target).
In some instances, the target company will cease to exist altogether as a legal entity and will no longer trade. The buying company will continue to exist and trade, but will own the target’s intellectual and physical property. Sometimes, the buying company will maintain the legal structure and identity of the target business as a subsidiary, allowing it to continue trading.
Types of Acquisition
There are several types of acquisition, but most come under one of three categories: Management Acquisition, Asset Acquisition, or a Tender Offer.
What is a Management Acquisition?
Management Acquisition sounds like one company head-hunting the management of another, but this is not what it means. Management Acquisition occurs when either an existing executive or ex-executive purchases enough shares to take control of a company. This process often results in the said company becoming a private business rather than being shareholder-oriented.
Also known as a Managerial-led Buyout, this often occurs when a business founder buys back control of a company they started. It can also be performed by board members who have a long connection or great track-record in leading the business.
The acquisition is made only through shareholder agreement. Usually, there is a shares threshold which must be met in order for the deal to go through. This means that x percent of shareholders must sell their shares to the buyer so they can take control – normally 50% or more.
The benefit to shareholders is that some will generate income from selling their shares, while those who remain shareholders will have someone they trust to steer the business. A negative side to Management Acquisition is that it is often funded through third party financiers with the debt shifted onto the business.
What is Asset Acquisition?
An Asset Acquisition is performed when the buyer wishes to purchase some or all of a company’s assets. However, the company itself is not purchased. For example, a car dealership may have 10,000 cars in its inventory. An Asset Acquisition could be to purchase the car stock but not the business.
Another example would be in acquiring intellectual property. Patents for a specific product or range could be acquired or even a brand name.
Asset Acquisitions are usually carried out when a target business is failing or going into bankruptcy. A bidding war unfolds for said company’s assets. The business then either uses this income to prop up the business or is then liquidated by administrators. In the latter case, shareholders get some return on their shares or the money is used to pay creditors.
What is a Tender Offer?
Lastly, a Tender Offer happens when a company buys existing shares from another business. The buyer must “tender” an offer first. This must be done publicly, with the offer made to a target company’s shareholders. In some cases, the boardroom may disagree with this offer but the shareholders embrace it. This then becomes a hostile process.
A Tender Offer is often the result of shareholders being dissatisfied with a board’s performance or running of their company.
The Securities and Exchange Commission has strict regulations for a Tender Offer. They require that any acquisition of a target company for 5% or more of its shares must be divulged to the Securities and Exchange Commission before being legally verifiable. The buyer must also announce this acquisition to the trading stock exchange.
Like a Management Acquisition, the success of this process is predicated on an agreed share threshold. If too few shares are sold, the process is null and void.
Often, there is no no-shop clause here. The buyer can sell the assets or business itself after purchase.
Reasons For Acquisitions
There are a number of reasons behind making any acquisition. These include Future Sales, where a business acquires another to improve its performance, increasing its value for a later sale. Another reason is Accelerating Market Access. This involves a larger company using its resources to propel a smaller business and/or brand so that it has greater access to the market and potential sales.
Speculation is another motive for carrying out an acquisition. This usually takes the form of a larger business making an affordable acquisition of a company which may or may not become hugely profitable in the future.
The final two motivations are Consolidation – where buying out a competitor and removing them from the market, increases the buying company’s market share – and Resource Acquisition. The latter occurs when it is cheaper to buy a company and its products than invest in R&D to develop your own.
Want to Know More About Acquisitions?
I hope this article helped you in understanding the basic components of acquisitions. If you would like to super-charge your knowledge and learn from the best about Mergers and Acquisitions, head over to the DealMakers Podcast, where successful entrepreneurs from around the world share their winning strategies for business and investment.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.