Acquisition

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What is an 'Acquisition'

An acquisition is a corporate action in which a company buys most, if not all, of the target company's ownership stakes to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy when 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.

BREAKING DOWN 'Acquisition'

A form of takeover, an acquisition occurs when a buying company obtains more than 50% ownership in a target company. The approach is often used to increase market share, add new niche offerings or increase the overall amount of business assets. As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.

Friendly and Hostile Acquisitions

Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired. Hostile acquisitions don't have the same agreement from the target firm, and the acquiring firm must actively purchase large stakes of the target company to have a majority stake.

Friendly acquisitions often work towards a mutual benefit for both the acquiring and the target companies. The companies develop strategies to ensure that the acquiring company purchases the appropriate assets, including the review of financial statements and other valuations, and that the purchase accounts for any obligations that may come with the assets. Once both parties agree to the terms and meet any legal stipulations, the purchase moves forward.

Hostile acquisitions, more commonly referred to as hostile takeovers, occur when the target company does not consent to the acquisition. In this case, the acquiring company must attempt to gather a majority stake to force the acquisition to go forward. To acquire the necessary stake, the acquiring company can produce a tender offer designed to encourage current shareholders to sell their holdings in exchange for an above market value price. To complete, a 30-day acquisition notice must be filed with the Securities and Exchange Commission (SEC) with a copy directed to the target company's board of directors.

Share Prices and Acquisitions

In either case, the acquiring company often offers a premium on the market price of the target company's shares 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.

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