It is a business transaction where a company purchases shares or stocks of another company. The idea behind an acquisition is to gain control of the other company to inherit their strengths, market share and build on their products.
The acquiring company purchases the majority of the stock in the acquired firm. Such a transaction makes the acquiring company the new owner of the acquired firm with total control of its assets. Both companies continue to exist. The acquiring company acts as the parent organization for these separate legal entities.
A merger is another type of transaction term that is used interchangeably with an acquisition. In a merger, both companies combine, and only the parent company continues to exist. Another type of transaction is an amalgamation. Here, both companies are essentially dissolved, and their teams work together to create a new firm.
One of the largest merger deals in history took place in 2000 when U.K based telecom giant Vodafone acquired Mannesmann, a German industrial conglomerate. Mannesmann as an organization ceased to exist in the engineering, automotive, and telecommunications sectors post the merger with Vodafone. Maruti Motors from India amalgamated with Japanese Motor company Suzuki to form a new company called Maruti Suzuki (India) Limited.
Real-World Example of Acquisition
Hardware manufacturer Dell acquired technology storage and solutions provider EMC for $67 billion in 2015. EMC was absorbed and renamed Dell Technologies. The acquisition helped Dell gain a significant market share in the storage solutions domain. It enabled them to become an end-to-end technology solutions provider operating in all major sectors like servers, virtualizations, storage, and Personal Computers.
NVIDIA acquired Arm Limited in 2020 for $40 billion, making it the largest tech acquisition in this new decade. Through this merger, NVIDIA aims to combine its AI solutions with Arm Limited’s computing prowess to create an AI-powered future in the computing world.
IBM acquired Red Hat for $34 billion in 2018. The company provides enterprise solutions and a Linux-based operating system. IBM collaborated with Red Hat for over 20 years in the IT sector before eventually acquiring them. IBM claims that this deal will make them a technology leader in hybrid cloud solutions with sufficient expertise in tackling industry leaders like Amazon Web Services, Microsoft Azure, and Google Cloud Platform.
Significance of Acquisition
An acquisition helps the acquiring company enter into new markets with a brand that is already a reputed figure in that industry or domain. The acquisition of Beats helped Apple venture into the consumer audio product market and used Beat’s expertise to create its line of audio products like the Airpods series.
An acquisition also helps the acquiring company to increase its revenue streams and market shares across different portfolios. The acquisition of Hamleys helped Reliance tap into the toy manufacturing sector and improved its revenue growth.
When a much larger and more successful company acquires a small company, the acquired company has direct contact with expert resources that were earlier not accessible. They can interact with specialists in the financial, legal, and human resource sectors.
Types of Acquisition
An acquisition can be classified based on the business operation of the two companies involved. A horizontal acquisition is an acquisition where a company acquires another company from the same industry or sector. Facebook acquiring Whatsapp is an example of a horizontal acquisition as both companies operate in the social media sector. Whatsapp continues with its operations under its name, but Facebook owns it.
A company acquires another firm that operates as a supplier of raw materials and products to the parent company. A phone manufacturing company that acquires a company operating in small screen display technologies is categorized as a vertical acquisition. Such acquisition aims to gain control over the supply chain and thereby improve product manufacturing, reduce production costs, and time to market.
One company acquires another company operating in an entirely different sector. The main aim behind such an acquisition is to diversify the acquiring company’s portfolio and create new revenue streams across other industries and domains. An example of a conglomerate acquisition is when Apple, a technology company operating in mobile and PC domains, acquired Beats, a consumer audio product manufacturer, in 2014.