What Is Acquisition In Business? (With Advantages And Types)

By Indeed Editorial Team

Updated 22 September 2022 | Published 29 April 2022

Updated 22 September 2022

Published 29 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

An acquisition happens when a business purchases another business, hoping that the synergy can make them more profitable. While acquisitions can help a business increase its market share and scale, if not done strategically, they may cause culture clashes and low employee morale. If you are planning a career in business management or want to work in the merger and acquisition department of a company, you can benefit from knowing how an acquisition in business works. In this article, we discuss what business acquisition is, explore its types, understand how it works and discover how it can impact employees.

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What Is Acquisition In Business?

An acquisition in business is a corporate transaction in which one company takes partial or complete control of, or purchases, another existing company. Usually, a larger company acquires a smaller company, but there may be instances where a small company acquires a large existing company. A company can acquire another company to leverage its customer base, market presence and operations. An acquisition is a popular way of business expansion. A business acquisition can also help the acquiring firm to enter a new market and utilise the target company's resources and operational capabilities.

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Advantages Of Business Acquisition

Here are a few advantages of business acquisitions:

  • Improves the economies of scale: A large business that has acquired a small business is likely to have higher material and supply requirements. By purchasing raw materials in bulk, a business can improve the economies of scale through lower costs.

  • Lowers the labour cost: With an acquisition, multiple staff may perform the same job, allowing the company to eliminate extraneous staff and reduce overall labour costs.

  • Provides more financial resources: Two companies involved in the acquisition process might combine their financial resources to increase the financial capacity of the new company. Also, it might result in new investment opportunities and help the company reach a wider audience base.

  • Increases market share: When two companies operate in the same market or provide similar products, their synergy can increase the market share of the newly formed company.

  • Enhances distribution capacity: An acquisition might help expand a company geographically, enhancing its ability to distribute goods to a newer market.

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Disadvantages Of Business Acquisition

Here are a few disadvantages of business acquisition:

  • Results in lost opportunities: A company spends a lot of time, money and energy on the acquisition of a business. This might mean forgoing other potential opportunities.

  • Requires hefty legal costs: Acquiring a company often involves high legal costs. This might include fees for lawyers and other professionals who are actively involved in the acquisition process.

  • Involves expenses associated with the deal: Apart from paying the professionals who are executing the acquisition process, the acquirer company may owe a large amount to the target company for its business and assets.

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How Is A Merger Different From An Acquisition?

Here are a few differences between a merger and an acquisition:

Merger

A significant difference between merger and acquisition is that a merger involves the idea of brand identity. Two or more merging companies cease to exist as individual entities in a merger. Instead, they form a new brand name that might include the name of all the merging companies. Also, such a corporate transaction benefits all parties, as the new entity is often more profitable and has an increased value.

Acquisition

An acquisition is not a mutually beneficial corporate transaction because one company acquires and takes over all the assets. In such a scenario, the acquired or target company loses its identity and becomes a part of the acquiring business. Often, acquisitions are purchases rather than agreements. The acquiring company buys out the company's outstanding shares to complete the corporate transaction.

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4 Types Of Acquisition In A Business

Here are four types of business acquisitions:

1. Vertical acquisition

Vertical acquisition is the most common type of acquisition between two companies. In a vertical acquisition, a company acquires a distributor or supplier of its products. For example, a clothing company acquires a textile factory. The acquired company is lower or higher in the manufacturing process. A vertical acquisition occurs when a company wants more control over the supply chain. Such acquisitions are likely to make a company independent of market trends and vendors because companies no longer depend upon suppliers to produce their products.

2. Horizontal acquisition

A horizontal acquisition occurs when a company acquires another company in the same business, industry or sector. It primarily means that the buying company acquires one of its competitors. Horizontal acquisitions happen when a company wants to eliminate competition and acquire market share rapidly. When a company buys its competitor, it can often result in a monopoly.

3. Conglomerate acquisition

A conglomerate acquisition occurs between companies with different product lines, geographies, business models and customers. Usually, such firms have nothing in common, and the acquirer company wants to diversify their risk profile and cover new markets. For instance, a food company can acquire a toy company. Such an acquisition serves as a way for the acquirer company to protect itself from market fluctuations because it is highly unlikely that a company might lose all its money at the same time.

4. Congeneric acquisition

Congeneric acquisition occurs between two companies that are in the same industry. These two companies can be companies with similar production technology distribution channels, but the company's production activities are different. These two companies are not competitors. For instance, a company selling cosmetics products in India might buy a company selling cosmetics products in France. Such an acquisition helps a company absorb its competitor before it becomes an actual threat. Rather than allowing a new brand to capture a market, they make an acquisition and keep their potential competitors away from the market.

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How Does An Acquisition Work?

Often, an acquisition happens through friendly discussion between two companies in which the target company welcomes the acquisition but does not change their name after the acquisition. In this type of acquisition, two companies negotiate the deal and terms of acquisition before reaching an argument. When an acquisition takes place without the consent of the target company, it is a hostile takeover. In such a takeover, the acquirer company holds over 50% share of the target company. Usually, the acquirer company buys the company's shares from the existing shareholders at a price higher than the market price.

Irrespective of whether the acquisition is a friendly or hostile takeover, the acquirer company purchases shares from the shareholders at a price higher than the market price. The difference between the selling price of the share because of takeover and current market value is the premium the acquirer company pays to the shareholders. Also, the entire acquisition process is a no-shop clause. This means that the target company has to sell all their shares and assets to the acquirer company.

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How Does An Acquisition Impact Employees?

An acquisition can increase the stress level of employees working with both companies. It can also present new opportunities for the employees. Here are some ways an acquisition can impact employees:

  • Uncertainty: The uncertainty resulting from an acquisition can affect the target company's employees. This uncertainty might increase if employees disapprove of the transition and such employees might prove less effective than employees who are happy with the transition.

  • Culture clash: It might be essential for the employees of the target company to understand the culture, operating environment and management structure of the acquirer company. Often, employees may find it difficult to adapt to the new culture.

  • Stock price appreciation: The stock price of the acquirer company rises if the acquirer company pays a higher stock price than the market price of the target's company stock. This might result in capital gains for employees or an increase in profits if employees hold any share in the target company.

  • Wage disparities: Several wage disparities might exist between the target company and the acquisition company. Even small wage disparities can cause resentment in the target company's employees.

  • New job opportunities: If the acquirer company is large, it might generate new job opportunities for the target company's employees. This might allow employees to work in a foreign company or move into more senior roles after acquisition.

  • New training opportunities: To make new employees adept with the acquirer company's culture, the acquirer company might provide new training opportunities. Such training can help employees up-skill and learn something new.

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