What Does Acquisition Mean in Business?

Acquisitions play an important role in the long-term success, as well as growth, of many companies. Google’s parent company, Alphabet, for example, has reportedly acquired over 200 companies, including the telecommunications company Motorola Mobility for an estimated $12.5 billion. But even smaller companies use acquisitions to strengthen their market presence. So, what does an acquisition mean in business exactly?

What Does Acquisition Mean in Business?

Overview of Acquisitions

An acquisition, when used in the context of business, refers to the purchase of some or all of a company’s shares to leverage the purchased company’s strengths and/or weaknesses. When a company acquires another company, it gains ownership and, therefore, decision-making authority in the purchased company. The acquiring company can then use the purchased company for their own financial gain.

Most acquisitions involve purchasing 50% or more of the target company’s shares, which is referred to as a majority investment. Others, however, involve purchasing less than 50% of the target’s company’s shares, which is referred to as a minority investment. Majority investments are preferred for acquiring companies because it grants them the authority to make decisions without prior approval from the target company’s board of directors.

How Does an Acquisition Work?

First, a company looking to increase its market presence through an acquisition will research prospective companies to acquire. After identifying a target company with specific strengths and/or weaknesses, the acquiring company will contact the target company to see if they are interested in an acquisition. Also known as a friendly takeover, this is the most common way in which acquisitions are handled.

With that said, some acquisitions may be forced, meaning the target company doesn’t agree it. Also known as a hostile takeover, it involves the acquiring company purchasing some or all of the target company’s shares. Hostile takeovers can only occur if the target company is listed as a public company.

Acquisitions are mutually beneficial for both parties. The acquiring company can use the target company’s strengths or weaknesses for its own financial gain. On the other hand, the target company raises capital through the sale of its shares.

Acquisition vs Merger: Are They the Same?

The terms “acquisition” and “merger” are often used interchangeably when referring to deals in which two companies are joined. While similar, though, acquisitions aren’t the same as mergers.

An acquisition simply involves one company purchasing some or all of another company’s shares. In comparison, a merger is a mutual agreement between two companies to form an entirely new company.

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