What Is a Defensive Acquisition?

A defensive acquisition is a corporate finance strategy that consists of companies acquiring other companies and assets as a "defense" against market downturns or possible takeovers. A defensive acquisition contrasts with the normal impetus for an acquisition, which is usually increased market share or revenue.

Key Takeaways

  • A defensive acquisition occurs when a company buys another company as a "defense" against market downturns or possible takeovers.
  • Unlike most acquisitions, which are pursued primarily as a platform to grow and expand, defensive acquisitions are all about protecting what a company already has.
  • Tactics include buying up smaller rivals to safeguard market share and ensure that any eventual hostile takeover is deemed too large by antitrust regulators.
  • Companies might also seek to thwart the advances of larger predators by making acquisitions that significantly increase their debt piles.

Understanding a Defensive Acquisition

Acquisitions, the act of a company purchasing most or all of another company's shares to gain control of it, are a frequent occurrence in the corporate world, offering perhaps the quickest way for a business to grow and expand. Companies provide all types of explanations for why they are spending big dollars pursuing such a strategy. Usually, they will cite economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings, all engines of growth, as their main objective.

In some rarer cases, acquisitions may also be targeted not as a means of attack but as one of defense. Rather than buying out another company as an offensive strategy to grow, it’s possible that such a move was principally made to protect and safeguard what a company already has. The goal could be to defend against competitors or to stave off the threat of bigger predators engaging in hostile measures to take it over.

Important

An acquisition can generally be categorized as defensive if it was executed primarily to prevent a company from losing market share, coming under attack, and potentially one day being swallowed up by a larger predator.

Defensive Acquisition Methods

Buying up Smaller Competitors

A company will sometimes embark on a defensive acquisition strategy by purchasing smaller firms that are in the same line of business. By acquiring these firms the company protects itself from the advances of others, becoming large enough that any takeover will likely result in the acquirer running afoul of antitrust laws—regulations that monitor the distribution of economic power in business, making sure that healthy competition is allowed to flourish and economies can grow. 

Borrowing Money to Make Acquisitions 

It’s not uncommon for defensive acquisitions to be financed predominantly with debt financing, too. A company viewed as an attractive acquisition, otherwise known as a target firm, may lose some of its luster if it is highly leveraged, as whoever takes it over would then have to inherit that debt burden.

Real-Life Examples of Defensive Acquisitions

Facebook, Inc.'s (FB) $19 billion takeover of WhatsApp in 2014 and nearly $1 billion acquisition of Instagram in 2012 may be considered defensive acquisitions.  In both instances, Facebook was working on or had similar capabilities, but the built-in user bases and growing competitive threats from each made a defensive acquisition an attractive opportunity.

Another potential example is the 2020 merger of T-Mobile US, Inc. (TMUS) and Sprint Corp. By combining, the third- and fourth-largest wireless carriers in the U.S. became big enough to rival sector juggernauts Verizon Communications Inc. (VZ) and AT&T Inc. (T), during a period of industry-wide technological change. Joining forces also made it a lot less likely that either one of them would be taken over by a larger peer, given that antitrust regulators aren’t much in favor of monopolies

Special Considerations

It’s hard to say how well defensive acquisitions fare compared to other forms of takeovers. Empirical analysis of specific acquisition strategies offers mixed insight, mainly because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy.

The fact that the stated strategy may not even be the real one adds to this confusion. Companies regularly hype up a variety of strategic benefits from acquisitions, when in reality the majority of them mainly function as a vehicle for profit-boosting cost cutting.