Acquisition: Definition, Types and Laws
Acquisition essentially means ‘to acquire’ or ‘to takeover’. And when we talk about acquisition, it is always clubbed with mergers. In short mergers and acquisitions are referred to as M&A.
The process of acquisition is a case of dominance of one company over the other. Here a bigger company will take over the shares and assets of the smaller company and either run it under the bigger company’s name or might run it under a combined name.
Types
There are four types of acquisitions:
Friendly acquisition
Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is cordial.
Reverse acquisition
A private company takes over a public company.
Back flip acquisition
A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company.
Hostile acquisition
Here, as the name suggests, the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, their by establishing majority and hence initiating the acquisition.
Defense strategies to prevent hostile acquisition
- Poison pill: The target company tries to ward off acquisition by making its stock less attractive to the buyer company. The existing shareholders can buy the shares at a discount, while nobody else is given this incentive.
- In the sandbag tactic, the target company stalls the acquisition until a more favourable company attempts the takeover.
- If the management team of the target company is the core fuel and losing them could mean big loss to the acquiring company, then the people pill strategy is used where the entire team of the target company threatens to quite altogether upon hostile acquisition.
- Macaroni defense is employed by giving out bonds with guarantee that the bonds will be redeemed at a higher price if the company is taken over.
Other tactics are back end, greenmail, bankmail, whitemail, crown jewel defense, golden parachute, white knight, pac-man defense, etc. The list is endless.
Laws governing acquisitions
In the UK, acquisitions are governed by City Code on Takeovers and Mergers. The laws for takeover are mentioned in this in detail.
The main purpose of this code is to ensure all the shareholders are treated equally and without any discrimination. The code is designed to make the acquisition as simplified as possible.
Impacts of acquisition
The most obvious impact is there is drastic increase in sales and therefore the revenue. The acquisition also leads the buying company into new territories and new kinds of businesses. There is a definite decrease in competition by takeovers for the buying company.
On the other hand, many employees get laid off and existing employees may lose morale, though they get their share of compensation.
Acquisitions are driven by opportunistic competitors. Being on guard will save the skin.
