What is an Acquisition?
An acquisition happens when a business purchases part or all of another business, for any number of reasons. Typically, the acquiring business will be larger than the acquired company.
Acquisitions enable larger companies to buy smaller firms, which may allow the acquiring companies to add value to new markets — basically, to offer more or cooler services or products to more people. Acquisitions can happen with or without the targeted company’s consent, although ideally they happen in a cooperative context. Acquisitions are not to be taken lightly, as they don’t always have a happy ending. It’s important that companies do their due diligence when looking to acquire another firm, analyzing the target company’s balance sheets and income statements to ensure they’re getting a good deal.
Amazon famously made headlines in 2017 when it acquired Whole Foods for $14B. The acquisition not only allowed Amazon to make a splash in the grocery industry, it also gave the retail giant access to Whole Foods’ unique consumer data set. That information may help Amazon fine-tune its ads and promotions to better fulfill its clients’ needs.
An acquisition is like adopting a child...
During an adoption, a family brings home a new, smaller human. During an acquisition, one company takes on another, often smaller, one. Parents adopting a child are looking to grow their family and gain the benefits that the new child brings, like an increase of joy and love in the home — but sometimes the new addition can cause trouble, too. Similarly, a company may hope to gain advantages from bringing another company into the fold, but it can run into pitfalls along the way.
Chances are you’ve heard of acquisitions among larger firms, like the Amazon/Whole Foods deal. But acquisitions also happen with small- to medium-sized companies.
Larger companies often acquire smaller ones that show signs of growth potential in areas where they want to expand. These smaller companies often have products that are similar to those of the larger firm. For example, when Facebook acquired the messaging app Whatsapp for $19 B, it allowed the social media platform to bring in revenue from more sources and to offer more diverse services. Facebook realized that many of its users travel and need to contact each other for free, regardless of their locations; WhatsApp’s technology would allow them to do that.
Companies may also look to acquire smaller competitors before those competitors expand and become threats. In that case, they may tempt the smaller startups with substantial cash or stock payouts as reward for acquisition. Those companies can opt to take this compensation and benefit from the larger company’s resources, instead of risking long-term business failure.
These terms might sound the same, but they have entirely different meanings and applications in this context:
Unfortunately, mergers don’t always have a happy ending. Take the AOL and Time Warner merger –- an event that is often referred to as the worst merger of all time. Time Warner wanted an online presence and access to AOL’s millions of subscribers. AOL wanted access to Time Warner’s cable network and content. It sounded like a win-win. Unfortunately, the cultures of the two businesses clashed to such an extent that it made collaboration difficult. Then came the burst of the dot-com bubble, when AOL’s value tumbled from $226B to roughly $20B. The rest is history.
Finding the right company to acquire can be tricky. In fact, buyers routinely overestimate the expected benefits of acquisitions while underestimating the one-time costs related to the purchase.
If you’re considering acquiring another business, it’s critical that you thoroughly assess that business’ current market value and financial standing, as well as any potential obstacles you may face, such as cultural clashes.
Here are a few characteristics to look for:
What is Income?
For individuals, income is the money they earn from working, or the returns from their investments. For businesses, it's what’s left of their revenue after expenses.
What is Venture Capital?
Venture capital is a type of investment business ventures can seek from financially-qualifying individuals, investment banks, or financial institutions to help jumpstart operation and scale their business.
What is Corporate Social Responsibility?
Corporate social responsibility is the idea that companies should aim to have a positive rather than a negative impact on society, whether environmentally, economically, or socially.
What is Equity?
Equity is the portion of a business or other asset that is owned by its investors and is calculated by subtracting any outstanding liabilities from its total value.
What is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is the total value of all goods and services that a country produces in a set period of time.