Acquisitions
Chapter 2 cont....
III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer.
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 or longer established company and keep its name for the combined entity. This is known as a reverse takeover. There are two major types of Acquisition. These are explained as follows:
1. Management Buyouts: It is a form of Acquisition wherein the management of a company decides to take their company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because it’s a complicated process that requires significant capital. Hence, large borrowings are made by managers to buy stocks held by large shareholders - who later become the shareholders of the new entity to earn higher returns for themselves.
2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one company purchases a majority interest in the target company resulting in loss of management control for the target company. Incidentally, the acquiring company has a stronger market standing than the target company in this case. It is definitely not a merger of equals. Typically, this type of acquisition is undertaken to achieve market dominance. There are three types of Takeovers; namely:
a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is undertaken by purchasing the majority of outstanding shares of the target company in the open stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle Corp. and Peoplesoft Inc. Hostile Takeover
b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large amount of Debt . financing to pay the target company its valuation at the time of the takeover in cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as junk bonds.) E.g. Oracle Corp. and I . Flex Takeover
3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased, rather than its shares. This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company unattractive for buyers (an asset buyout strategy may be pursued in almost any case where the potential target company has an unattractive financing structure).
Motives behind Acquisitions
- To achieve Market Dominance.
- To achieve Economies of Scale.
- To Increase Revenues.
- To enable Cross - Selling.
- To improve Technological Capabilities.
- To enable better Tax Management.
- To expand into new Geographies.
- To expand Customer Base, etc.
Benefits of Acquisitions
- Fairness of Price Paid
- Lower Cost to the Acquiring firm
- Market Dominance
Issues in Acquisitions
- Resistance from the target company
- Inability to secure adequate shares to gain Management Control
- Hostility
- Reputation Assaults
