A company or a business purchased through a corporate acquisition or a merger by an acquirer.

Author: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Reviewed By: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Last Updated:November 22, 2023

What Is an Acquiree?

An acquiree is a company or a business purchased through a corporate acquisition or a merger by an acquirer. It is also known as the target company. 

If the company's management favors the transaction, it is usually referred to as a friendly takeover. 

In some cases, acquirers can try to take over the company against the wishes of the management of the acquiree. This is known as a hostile takeover. However, the acquiree's management can employ different methods to avert the takeover.

Why do companies get acquired?

There are various reasons why an entity may try to acquire a business or company.

Some of them include:

  • Synergy: This refers to when the combined value of two organizations is greater than the sum of their importance. The acquirer company's management believes that the combined market value and performance of the two companies will be greater than the sum of them individually.
  • Diversifying business: The acquirer expects strong growth in the industry in which the acquiree operates and would like to diversify its business through acquiring it.

  • Economics of scale: This refers to the cost savings when production quantities are increased. In this scenario, the acquirer expects more economies of scale once they take over the operations of the acquiree's business.
  • To curb competition: Sometimes, companies acquire others to eliminate competitors. These acquisitions generally increase the market share and customer base of the company.

How do companies get acquired?

There are a few ways in which companies can be acquired:

  • Acquisition: This is a process where companies purchase a majority or entire stake of the target company to gain control over its business. It is a lengthy process, usually carried out by investment bankers through cash, trading stocks, or a combination of both.
  • Merger: This is an agreement between two individual companies to combine to form an entirely new firm. This process is known as a merger

Acquisition of a company always takes place at a price premium, called a control premium. This ensures that potential buyers win the support of the acquiree's shareholders so that the transaction happens smoothly. 

Business Valuation Criteria for Acquirers

Let's understand what makes a company a good acquiree below:

  • Growth potential: Having a plan to move to a new industry, the development of new products and services, improvised marketing techniques, and other characteristics that could expand a business.
  • Consistent growth in revenue and profit: This shows the clean operating history of the company and the ability to mitigate challenges in between. It ensures that the company is exploring new growth opportunities to increase its revenue.
  • Professional Management: The management team should be experienced and able to handle issues in difficult times. 
  • Vast distribution network: A strong distribution network makes the company attractive to the acquirer. It increases the rate at which products can be distributed to customers.
  • Good brand value: A strong brand can always help to increase trust among consumers. Having an authentic brand will earn new customers with positive word-of-mouth marketing.
  • Large existing customer base: Having an existing customer base can encourage companies to launch new products. It can also put the company ahead of the competition.
  • Minimal litigation threats: Companies with fewer litigation threats are significant for acquirers as they reduce the risk factor in their investments. It also increases the trust in existing management.

Share Price of Aquiree

As discussed earlier, the buyer usually acquires a target firm at a premium to its fair market value, leading to a significant upsurge in its share price. Let's understand this with an example:

Consider the acquired's current market value is $100,000 with a per-share value of $10 and 10,000 total shares.

The acquirer believes that this company has excellent potential to grow and is willing to purchase the firm at a valuation of $150,000. This deal will trigger a massive increase in the current share price to $15, a 50% increase.

Post-Merger Adjustments

After a merger or acquisition, the management of the acquirer may make the following changes:

  • Identity: Sometimes, the management may wish to change the acquiree's name after the transaction. This is usually not preferred, as the company might have already created positive brand recognition.
  • Management: In the case of a hostile takeover, the acquiree's leadership is more likely to be changed. In a friendly acquisition or a merger, the existing management will generally continue to run the business unimpeded.
  • Business Strategy: The entire strategy of the business could be changed to a better and improved version, according to the new management.
  • Re-Organization: The corporate structure may need to be changed, as it's crucial for a new company after a merger. This may involve laying off employees or making some management changes. The changes mainly depend on the acquirers and their strategy.

Defensive Measures

Companies adopt various defense mechanisms to avoid a hostile acquisition or takeover. The tactics are divided into pre- and post-offer defense mechanisms based on the offer.

Some of the pre-offer defense mechanisms include: 

  • Poison Pill                 
  • Poison Put
  • Golden Parachutes
  • Supermajority Provisions
  • Just say 'NO' defense
  • Recapitalization
  • Staggered board
  • Standstill agreement defense
  • White squire defense

Some of the post-offer defense mechanisms include:

The pre-offer defense measures are used to either impose constraints or to reduce the attractiveness of the company by restricting the benefits to the possible bidder. 

Post-offer defense tactics are implemented once a hostile takeover bid has been received.

Researched and authored by Pranav Kanjarla | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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