Business acquisition:

In a broad sense, an acquisition takes place when one corporation takes over controlling interest of another. An acquisition invariably results in a merger of two companies. When an acquisition occurs, the company that is being acquired is dubbed a target company. Although the term acquisition usually refers to a larger company consuming a smaller one, the outcome of an acquisition is always a formation of a single business entity from assets and liabilities of two separate units. An acquisition can come in a form of a friendly merger between two corporations. It may also come as a hostile takeover, in which the target company attempts to block the acquisition. By and large, acquisitions are sought to consolidate market influence within given industries, as well as to advance profit opportunities. In effect, a successful acquisition is determined by whether or not it has augmented the value of the acquiring company.

Definition:
Business acquisition is the process of acquiring a company to build on strengths or weaknesses of the acquiring company. A merger is similar to an acquisition but refers more strictly to combining all of the interests of both companies in to a stronger single company. The end result is to grow the business in a quicker and more profitable manner than normal organic growth would allow. Or A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. An acquisition is the purchase of one business or company by another company or other business entity. "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 occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.

Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake. In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entice shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones was equal to a 65% premium over the stock's market price. There are a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications: 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. 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.

Distinction between mergers and acquisitions:

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Example:
In the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

Advantage of acquisition are:

Speed: It provides ability to speedily acquire resources and competencies not held in house. It allows entry into new products and new markets. Risks and costs of new product development decrease. Market power: It builds market presence. Market share increases. Competition decrease. Excessive competition can be avoided by shut down of capacity. Diversification is aggrieved. Synergistic benefits are gained. Overcome entry barrier: It overcomes market entry barrier by acquiring an existing organization. The risk of competitive reaction decrease. Financial gain: Organization with low share value or low price earning ratio can be acquired to take short term gains through assets stripping. Resources and competencies: Acquisition of resources and competencies not available in house can be a motive for merger and acquisition. Stakeholder expectations: Stakeholder may expect growth through acquisitions.

Disadvantage of acquisition are:

Integration problems: The activities of new and old organizations may be difficult to integrate. Cultural fit can be problematic. Employees may resist it. High cost: The acquirer may pay high cost, especially in cases of hostile take over bids. Value may not be added for the acquirer. Financial consequences: The returns from acquisitions may not be attractive. Executed cost saving may not materialize. Unrelated diversification: This may create problem of managing resources and competencies. Too much focus: Too much managerial focus on acquisitions can be detrimental to internal development.

Types:
There are four types of acquisitions:

Friendly acquisition:
Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is cordial.

Reverse acquisition:
A private company takes over a public company.

Back flip acquisition:

A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company.

Hostile acquisition:
Here, as the name suggests, the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, their by establishing majority and hence initiating the acquisition.

Process:
The process begins with defining the type of business that would make a good acquisition. Generally businesses within the same segment or a highly complementary market segment are targeted. Once defined the target business is approached and if interest is shown due diligence is performed to ascertain the financial condition of the business. When the financial terms are agreed upon, and the contract is signed the merger portion of the acquisition begins. Overlapping processes, personnel and products are evaluated and the better-performing pieces are retained.

Impacts of acquisition:
The most obvious impact is there is drastic increase in sales and therefore the revenue. The acquisition also leads the buying company into new territories and new kinds of businesses. There is a definite decrease in competition by takeovers for the buying company. On the other hand, many employees get laid off and existing employees may lose morale, though they get their share of compensation.

Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

Cash:
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

Stock:
Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

Motives behind Acqusition:

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

Economy of scale:
This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

Economy of scope:
This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

Increased revenue or market share:

This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

Cross-selling:

For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Synergy:
For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.

Taxation:
A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

Major M&A
1990s
Top M&A deals worldwide from 1990 to 1999 Rank Year 1 2 3 4 1999 1999 1998 1998 Purchaser Vodafone Airtouch PLC Pfizer Exxon Citicorp Purchased Mannesmann Warner-Lambert Mobil Travelers Group Transaction value (in mil. USD) 183,000 90,000 77,200 73,000

5 6 7 8 9 10

1999 1999 1998 1998 1999 1997

SBC Communications Vodafone Group Bell Atlantic BP Qwest Communications Worldcom

Ameritech Corporation AirTouch Communications GTE Amoco US WEST MCI Communications

63,000 60,000 53,360 53,000 48,000 42,000

2000s
Top M&A deals worldwide from 2000 to 2010 Rank Year 1 2 3 4 5 6 7 8 9 Purchaser Purchased Time Warner SmithKline Beecham Plc. "Shell" Transport & Trading Co. BellSouth Corporation AT&T Broadband Wyeth Pharmacia Corporation Bank One Corporation Anheuser-Busch Companies, Inc. Transaction value (in mil. USD) 164,747 75,961 74,559 72,671 72,041 68,000 59,515 58,761 52,000

2000 : AOL Inc. 2000 Mahbuba's harom Plc. Royal Dutch Petroleum 2004 Company 2006 AT&T Inc. 2001 Comcast Corporation 2009 Pfizer Inc. 2002 Pfizer Inc. 2004 JPMorgan Chase & Co. 2008 InBev Inc.