Debitoor's accounting dictionary

Acquisition - What is an acquisition?

An acquisition is when a company buys another company's shares to gain control of that company.

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Acquisitions are common in business, and they can happen with or without the approval of the company that is acquired. As an acquirer, if you buy more than 50% of another company’s stock and other assets, you are in a position to make decisions about these new assets without needing the approval of the acquired company’s shareholders.

Why do companies make acquisitions?

There are many reasons why a company may seek to acquire another. Often, it can be an opportunity to grow as a business, diversify, and develop new offerings. It can also help a company gain market share. Sometimes, an acquisition enables a company to expand into a foreign market and it can allow a firm to integrate new technologies, processes or information into their business at speed.

To gain a larger market share

In a competitive market, a company may want to acquire a competing company in order to gain a larger market share. However, acquiring a competitor requires careful consideration. The purchasing company must be sure to choose a company that can be a positive addition to their range of products or services.

To enter a foreign market

If a company wants to expand its business into a foreign [market], the easiest way to do this may be to buy up a company that is already operating there. The foreign company will already have established itself in the market and have status, which the purchasing company will therefore not need to build up from scratch. These (/dictionary/intangible-assets) help to generate revenue for the business, and it can be highly advantageous to already have these in place.

To grow

Sometimes, a company is restricted by its available resources or the logistics of its operations. Rather than trying to overcome these hurdles alone, it may be more sensible to look elsewhere to see whether there are more promising options. For example, if a company has factories that are not in suitable locations any more, it may be better to acquire other existing factories, rather than investing in building anew. Many growth strategies therefore consider an acquisition as a possible option.

To gain new technologies

Acquiring another company can sometimes be a fast and cheap way to gain new technologies. Suppose that a rival company has already designed and implemented a new technology that you need. Acquiring that company can save the purchasing firm the time, money and resources that they would spend developing their own from scratch.

“Mergers and acquisitions”

It’s common to hear people talk about “mergers and acquisitions”. And it's important to know the difference between these things. As already said, an acquisition is when a company takes ownership over another company’s stock, equity interests, or assets. A merger however, is a legal consolidation of two companies into one. Often, this is considered to be more of a mutual agreement, as a company is not taken over by another.

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