What are acquisitions? Advantages & Disadvantages of acquisitions

In this blog post, we will explore the term "Acquisition" in business. Acquisition is a strategic business activity that can help your company grow and gain an advantage over competitors. We'll cover what acquisition means, what it roles are, and how many steps involved in an acquisition.

What are acquisitions?

An acquisition is the buying or taking over of one company by another. In other words, a company that wants to buy another business uses money or any asset as a means of payment for that purchase.

Acquisitions are very conventionally seen in businesses. This is often done by the larger company in order to acquire a smaller business that would not be able to grow any further on its own.

An example of this can be seen in Sprint and Nextel merger in 2005, when the telecommunications giant Sprint acquired Nextel. This was a great move for both companies, as it allowed them to become more competitive in the market and expand their services.

Differences between acquisitions and mergers

Acquisitions are quite similar to mergers in terms of what they are, but are also very different in many other aspects.

Mergers are when two companies come together and become one under a new name. There is no change in management or outside leadership for the business, only the combining of businesses. This often involves the exchange of shares between the two companies.

Acquisitions are very different in this way. While acquisitions also involve the joining of two businesses, there is change to management and leadership within one business, which requires heavy negotiating between both parties. This often involves the exchange of shares, but not always.

Advantages of acquisitions

An acquisition plays many important roles in a business strategies. In other words, there are many reasons why a company might wish to directly take control of anther business.

An acquisition helps decrease the number of competitors in the market.

Many big companies choose buying its competitor as the method to win in a competition. For example, after AOL and Time Warner merged in 2001 to become a bigger size, their combined market valuation increased from $350 billion to over $100 billion. Through this way, AOL and Time Warner can combine resources and decrease the number of competitors.

An acquisition reduces costs of acquiring new clients for businesses with low marketing budgets.

Sometimes acquisition can be more cost effective than advertising. For example, Pinterest acquired the startup Instapaper which has 3 million users at $15 million. Meanwhile, if Pinterest wanted to get that many users by themselves it would have cost at least $60 million and take years and years of effort and marketing spending for this social media platform.

An acquisition help the company own new technologies and intellectual properties.

Every business knows that good and original ideas are important to improve their services. When two companies merge, they can share technologies and intellectual property as well as decrease the cost of developing new products.

An acquisition helps increase or maintain market value for shareholders.

Some mergers happen because one company wants to offer all its shareholders a strong incentive such as cash or shares of the combined company. When this happens, the shareholders stand to benefit if the stock prices increase and they can sell their stocks at a profit once it goes up.

Disadvantages of acquisitions

In spite of the many advantages, acquisitions have disadvantages as well.

An acquisition can lead to a decrease in job creation and loss for those who work at the target company.

For example, when Oracle purchased PeopleSoft in 2004, it led to 11,000 layoffs instead of new job creations - which was quite disheartening to see.

When one company acquires another, it can damage people's confidence about the target business.

For example, when Dell bought Perot Systems it led to a decrease in employee morale and performance because of its poor management. In addition to this, customers started withdrawing from the newly acquired company as well.

An acquisition may involve a conflict of interest between the management team and shareholders.

For example, when M&S (UK) acquired Brooks Brothers it led to ethical issues for its employees. Additionally, salary packages received by top management became much more than their counterparts in the US because of the huge difference in taxation rules - which was seen as unfair by many people working at Brooks Brothers.

An acquisition can result in an increase in production costs for the target company.

When Unilever acquired Ben & Jerry's it led to decrease in production flexibility and cuts were made to employee salaries due to increases in staff numbers - which was quite disheartening for employees at the new location.

Preparation before an acquisition

To avoid the disadvantages of acquisition, there are certain things to be prepared in order to make sure it will run smoothly without causing more damage.

Make a thorough investigation before buying a company.

Before you decide to acquire another company, make sure you know your target well. Understand their financial health and the government regulations they are subject to. Check if there is anything that can turn any of the proposed deal into a problematic one by looking at all factors involved in the deal.

Always calculate the cost benefits of acquisition before making any decisions.

When two companies merge, they can share technologies and intellectual property as well as decrease the cost of developing new products. However, first they need to assess whether it is necessary for them to combine their resources or not - which includes making a thorough investigation and calculating the cost benefits.

Make sure that all the employees of the target company are on board.

When it comes to cash offer, some employees might disagree with their top management because they want to keep their jobs and may see things differently than what is good for the company as a whole. It's important to make sure everyone is ready before making any decisions.

Always have a clear exit strategy before buying another company.

When you buy companies for their intellectual property, it's important to have an exit strategy in mind so that you can sell them off if it doesn't work out well for you later on. Therefore, make sure there is always a buyer ready when the time comes.

Steps to carry out an acquisition

Business usually follow these steps to carry out an acquisition

Step 1. Find a target firm

Before making any decisions, you need to find the right company for acquisition. It's always better to look in related industries with similar nature of business, instead of finding something completely unrelated to your company.

Step 2. Propose an initial offer

Once you have found the perfect match for acquisition, make them an offer of how much you are willing to pay for them. You can share the numbers of other offers as well so they know you are serious about making an acquisition and having a higher chance of succeeding than your competitors.

Step 3. Negotiate the deal

After receiving your proposal, the company will either accept or reject it – which is why it's important to keep your cool and negotiate with them in a friendly manner. Let them know you are ready to listen to their concerns so that they can see you as an honest partner who is willing to work things out.

Step 4. Deal with any changes required by the company

Once the deal is done, there will be some changes for both companies to make, but it's important to do everything according to the initial plan. Any changes by either party might cause failures.

Step 5. Make sure your employees are ready

Before anything else happens, make sure all of your employees are on board with this new acquisition and willing to work with the members of the target company too. This is one of the most important steps in the whole process.

Step 6. Close the deal

After letting your employees know that they are all welcome, it's time to sign on the dotted line and close this deal you have worked so hard for these past few months.

Step 7. Implement the legal works

Once the deal is done, it's important to do all the legal works that need to be done in order to make this acquisition a success. Different countries have different rules related to acquisition. Make sure you are well-informed about them.

Conclusion

Acquisitions play a very important part of business. In addition to its roles, there are many disadvantages from an acquisition. Therefore, it is important to have a strong strategy when doing acquisition in order to ensure a successful process.

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