Acquisition
An acquisition/takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues, including market research, trade expos, sent up from internal business units, or supply chain analysis.[2] Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
A consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently owned. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not publicly listed. Some public companies rely on acquisitions as an important value creation strategy.[3] An additional dimension or categorization consists of whether an acquisition is friendly or hostile.[4]
Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful.[5] "Serial acquirers"[6] appear to be more successful with M&A than companies who make acquisitions only occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out created since the crisis are based on serial type acquisitions known as an ECO Buyout which is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management & Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out).
Whether a purchase is perceived as being "friendly" or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees, and shareholders. It is normal for M&A deal communications to take place in a so-called "confidentiality bubble", wherein the flow of information is restricted pursuant to confidentiality agreements.[7] In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly" as the acquirer secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation.
"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger is a type of merger where a privately held company, typically one with promising prospects and a need for financing, acquires a publicly listed shell company that has few assets and no significant business operations.
The combined evidence suggests that the shareholders of acquired firms realize significant positive "abnormal returns," while shareholders of the acquiring company are most likely to experience a negative wealth effect.[8] Most studies indicate that M&A transactions have a positive net effect, with investors in both the buyer and target companies seeing positive returns. This suggests that M&A creates economic value, likely by transferring assets to more efficient management teams who can better utilize them. (See Douma & Schreuder, 2013, chapter 13).
There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange.
As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate.[9] Extracting technological benefits during and after acquisition is an ever-challenging issue because of organizational differences. Based on the content analysis of seven interviews, the authors concluded the following components for their grounded model of acquisition:
An increase in acquisitions in the global business environment requires enterprises to evaluate the key stake holders of acquisitions very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Employee retention is possible only when resources are exchanged and managed without affecting their independence.[10]
- The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment and corporate environment
- The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.
- 1) Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition.
- 2) For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.
- 3) Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.
- 4) Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.
- 5) Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition.
