Business Acquisitions: Meaning and 03 Main Reasons for Acquisitions in the Business World

Business Acquisitions: Meaning and 03 Main Reasons for Acquisitions in the Business World

Business acquisition is when a company purchases all or most of another business organization’s shares to obtain control over the activities of that organization. If the company purchases more than 50% of the target business’s shares and other assets, it gains the power as an acquirer to make decisions about the acquired business’s assets and activities. These decisions can be taken without the approval of the organization’s other shareholders.

Acquisitions can be seen commonly in the modern business world. Many of those happen with the approval of the target company approval, while some happen even without the approval of the target company. The acquisitions that happen with approval often use the ‘no-shop’ clause’ during the process of acquiring.

Most attention in the business world is given to the acquisitions that happen of large well-known business organizations. However, in real-life scenarios, mergers and acquisitions occur regular basis between small and medium scale business organizations than between large companies.

There are several reasons for businesses to acquire another business. Below mentioned are a few reasons for the businesses to acquire another business.

– Growth strategy

When engaging in business activities, organizations may find physical and logistical barriers or issues with the resources. If a company is facing such issues often, acquiring another firm is more profitable than expanding the business on its own. This type of company can attract young companies easily to acquire and include into the revenue stream of the business as a new way of maximizing profits.

– Obtain new technology

With the increase of globalization and technological improvements, businesses often get the need to flexibly upgrade the technologies they are using for business functions. It is identified that sometimes purchasing another company with advanced technical knowledge is more profitable than implementing new technological advancements in the business.

It is identified as the most accurate, trustworthy, and reliable way of adopting technological advancements to the business without investing unnecessary time and effort in implementing technological advancements by the business itself.

– Method of entering into the foreign market

When a business wants to expand its activities and operations to another country, establishing the business in that particular country from scratch is difficult. The easiest way of expanding the business in another country is to purchase an existing company in that country. Since the purchased business already has an established brand name and other intangible assets of its own, it will be helpful for the acquirer to start off the business in a new market with a solid foundation.

Apart from the above-mentioned reasons, the need to achieve diversification, seeking economies of scale, expanding the market share, reducing costs, and identifying new market niches are a few reasons for a business to acquire another business.

Things to Consider When Conducting an Acquisition

There are several key things a business should check and consider when acquiring another company.

– The accurateness of the price

When getting into an agreement for an acquisition, the acquirers usually use several metrics to value the acquisition candidates. These metrics can vary from industry to industry. When identifying the price that has to pay for the acquire, the acquirer must check whether the price is worth the acquisition.

– Undue litigation – Even though having lawsuits are very common in the business world, the acquirer should check whether the level of litigation of the acquiring candidate is reasonable and normal for the size of the business industry they are operating.

– A load of debt – It is important for the acquirer to check and understand the level of liabilities the acquiring candidate has and check whether it is a normal scenario according to the industry. 

– Scrutinize the financials – A proper acquisition target will have well-organized and clear financial statements. This will allow the acquirer to transparently understand the financial position of the candidate and make a detailed decision about the acquisition.

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