An acquisition is buying out another company by purchasing a controlling stake
An acquisition occurs when one firm buys all or most of another firm’s shares to control the company. Buying over 50% of a company’s shares gives the power to the buyer to make the final decision related to the company’s operations.
Companies acquire firms for several reasons. One may be economies of scale, significant market share, diversification, cost reduction or new service offerings.
Acquisitions are often used as an entry point into foreign markets. Buying an existing firm in a country makes more sense since the brand is already well-known. It could ensure that the buying company starts on a solid base.
Acquisitions are also often done as part of a growth strategy. A large company could acquire a small one to expand its revenue streams. Another reason to acquire another company is to reduce competition. They may also do it to receive new technology. Sometimes, it is more cost-effective to buy another firm and implement its technology than to spend money developing it. Company officers must perform due diligence on target companies before an acquisition.
Before the acquisition, the company must evaluate whether the targeted company is the right candidate for an acquisition. The goal is to find out if the price proposed is correct. The exact metrics used will vary by industry.
Acquisitions mostly fail because of the asking price of the target company usually exceeds the metrics. Things like the debt load are usually examined. A target company with high levels of liabilities has to be viewed as a warning for problems ahead.
Another factor to consider is unnecessary litigation. While lawsuits are common in the business world, a good acquisition candidate should not have excessive legal issues going on.
Finally, the financials have to be checked. They need to be properly organized, allowing the buyer to exercise due diligence easily. Transparent financials help to prevent surprises when the acquisition is complete.
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