Acquisitions are one of the prevalent approaches in the corporate world. Business companies primarily acquire other companies for expansion, diversification, or competitive leverage. Lack of knowledge of the various types of acquisitions and their implications may lead to business judgment errors. This article will discuss what acquisitions are, the types of acquisitions, stock acquisitions, and asset acquisitions, their purposes, pros and cons, and practical examples.
What is an Acquisition?
Usually, the other word for the acquisition generally refers to taking control of the other company or asset. An acquisition is the acquisition of a controlling interest by one company in another's company, either in terms of assets or through its shares. In this process, the acquiring company would be able to acquire all the operations, assets, and customers of the target company. This may form part of a larger growth strategy consisting of gaining greater market share, acquiring new technology, or entering an entirely new market.
Read about the difference between Mergers & Acquisitions with examples!
Types of Acquisition
Understanding the different types of acquisitions requires tailoring a strategy that will best suit the company's goals. Each type of acquisition serves a purpose and has its specific advantages.
1. Horizontal Acquisition
Horizontal acquisition involves when a company acquires a company located in the same business, offering nearly similar products or services. The main objective of horizontal acquisition is acquiring market share, reducing competition, and achieving economies of scale.
Example: The purchase of Instagram by Facebook is a typical horizontal acquisition because the two companies competed in the same space of social media.
2. Vertical Acquisition
A vertical acquisition happens when one company buys another in the same industry but at a different stage of the supply chain. The goal is to control production, lower costs, and improve efficiency.
Example: The purchase of Whole Foods by Amazon is a vertical acquisition that directly controls the supply chain for groceries.
3. Conglomerate Acquisition
In conglomerate acquisitions, a company buys another company in a different industry. The goal is to diversify and lessen reliance on one market or product, which helps reduce risks.
Example: An example of a conglomerate strategy to reduce risk through the acquisition of firms in different industries, such as in insurance, utilities, and manufacturing industries, by Berkshire Hathaway.
4. Concentric Acquisition
Concentric acquisition means buying another business that has similar technology, products, or customers but doesn't directly compete. This type of acquisition aims to use strengths from related but different markets.
Example: Google's acquisition of Fitbit is an example of concentric acquisition, wherein it helped Google extend its sales into the health and fitness technology market.
5. Market-Extension Acquisition
Market-extension acquisition is when a firm buys another firm to enter new geographical markets or regions. In this manner, the acquiring firm expands its sale in new regions and increases the number of customers in those regions.
For instance, by acquiring Uber Eats India, Zomato was able to enhance its customer acquisition in other places within India.
6. Product-Line Extension Acquisition
A product-line extension acquisition is one whereby the acquiring company purchases another firm whose products or services extend or complement those of the acquiring firm. This help the acquiring firm expand on its product line even further and, therefore, its value to the customers.
For example, the acquisition of SodaStream by PepsiCo is a type of product-extension acquisition since it allowed the latter to enter the market for home beverage solutions.
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Means of Acquisition
Acquisition can be done through two primary means: stock acquisition and asset acquisition. Each has certain legal, financial, and tax implications.
Stock Acquisition
In a stock acquisition, the acquirer buys the shares of the target company directly from the shareholders. In this way, the acquirer gains control over the target company and all the assets and liabilities as well.
Advantages: much simpler process; ease in change of ownership; less business disturbances.
Disadvantages: Inheritance of all liabilities and possible unknown risks of the target company.
Example: When Microsoft acquired LinkedIn, it purchased outstanding shares of the company, and therefore, it was a stock acquisition.
Asset Acquisition
It becomes an asset acquisition when buying certain assets from a target company rather than its shares. This allows the acquirer the liberty to choose only the desired assets and leave the unwanted liabilities behind.
Benefits: choosing assets, avoiding debts, and flexible transaction options.
Disadvantages: It is also much more complex in the sense that it involves asset-by-asset transfer and tax implications will also be incurred.
Example: In most instances, when Apple acquires other companies' technology and intellectual property assets, it employs an asset acquisition method.
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Reasons of Acquisitions
Acquisitions are made for different strategic reasons depending on the business needs of the acquiring company.
Market Expansion: To enter new geographical markets or customer segments.
Higher Market Share: To eliminate competition and enhance dominance in a particular market.
Diversification: To reduce business risk and expand towards new industries or products.
Access to New Technology: To gain access to new technology or intellectual property that supports the existing products.
Synergies Benefits: The resources and operations of the two that are being merged yield increased efficiency and reduced costs.
Also read – Types of Mergers
Advantages of Acquisitions
Mergers and acquisitions bring several benefits, which can expedite the growth of a company along with profitability.
Quick Market Foray: An overnight market presence.
Economies of Operations: Cost savings are achieved through an efficient operation with economies of scale.
Product Line Diversification: Creates more products or services for the customer.
Revenue Expansion Potential: Significantly more sales are driven through cross-selling potential and an increased number of customers.
Disadvantages of Acquisitions
While acquisitions are a favourite, they also have a set of challenges that need to be considered.
Expensive: Acquisitions are very expensive, and an enormous amount of money has to be spent
Cultural Misalignment: The corporate culture of both organizations cannot be harmonized, causing problems in terms of integration and attrition of the employees.
Regulatory issues: Regulated very strictly in general, big mergers and acquisitions
Risk of failure: Acquisitions do not necessarily sail; they can go wrong due to poor strategies of integration or because of misaligned strategies
Top Examples of Acquisitions in the World
1. Facebook and WhatsApp
Horizontal Acquisition
$19 billion
Objective: To enhance its communication as well as to maintain its leadership in the world of social media.
2. The Walt Disney Company and 21st Century Fox
Type: Horizontal and Conglomerate Purchase
Amount: $71.3 billion
Reason: To expand the library of Disney with extra content, strengthen Disney's leadership in the entertainment industry, and support its Disney+ streaming service.
3. Google and Motorola Mobility
Type: Vertical Acquisition
Amount: $12.5 billion
Reason: To find out brand dominance through its hardware technology and patents and to enhance Google's mobile strategy.
Conclusion
Acquisitions are great tools for business growth and expansion. They can be categorized into various forms, each with strategic advantages and disadvantages. Knowing the various types of acquisitions, their purpose, and how they should be implemented can maximize their positive benefits and reduce negative risks. Whether one wishes to expand market share, diversify the product line, or access new technologies, acquisitions can change the game for achieving those ends.
Types of Acquisitions FAQs
1. What is Acquisition?
Acquisition refers to a transaction wherein one company buys another or its assets to gain control over the latter's operations and to enhance its business capabilities.
2. What are acquisitions mainly for?
The purposes of acquisitions are expansion, diversification, new technology acquisition, removal of competition, and operational synergies.
3. What is stock acquisition?
Stock acquisition refers to the process of buying shares directly in a company to obtain control over the assets and liabilities of the target.
4. What is asset acquisition?
Asset acquisition refers to a situation where the buyer purchases specific assets belonging to a company instead of its stock. In this respect, the acquirer can freely select what they want to buy without taking liabilities
5. What are the problems of acquisitions?
Problems include high costs, cultural integration hardships, regulatory hurdles, and the risk of not obtaining the anticipated strategic benefits.
