Acquirer
A firm or corporation that acquired the entirety or a portion of another company.
A firm or corporation that acquired the entirety or a portion of another company is known as an acquirer. This process of acquiring a company is called acquisition.
When a business wishes to grow, it can either start from scratch in a new market (Greenfield expansion) or purchase an established company (Brownfield expansion). Purchasing an established business offers the buying firm various advantages, such as market share, market presence, etc.
The acquiring company must purchase more than 50% of the stock in the target company to assume control over the management of the business.
The term "acquisition" typically refers to a larger company buying out a smaller one. But sometimes, the smaller company may take over bigger, established businesses, this type of acquisition is usually called reverse acquisition.
In a hostile takeover, the purchasing business approaches the shareholder directly to purchase the company without the consent of the management. In a friendly takeover, however, management approves the takeover and assists in its implementation.
The purchase perception as "friendly" or "hostile" is heavily influenced by how the acquirer company conveys the proposed acquisition.
Acquirer's Motives
The most common explanation for mergers and acquisitions (M&A) activity is that acquiring corporations want to enhance their financial performance or minimize risk.
However, in addition to these, various other reasons have been ascribed to purchasing a business, like diversification, tax benefits, acquiring technology, etc.
Some of the motives for acquiring the company are as follows:
The merged firm can benefit from the economy of scale by effectively cutting its fixed cost by eliminating redundant divisions or processes. As a result, higher profit margins are achieved through lowering costs compared to the same revenue stream.
2. Synergy
Synergy often means that the merged business will become more profitable or expand quicker following the merger than the enterprises functioning individually.
For example: If the two companies, i.e., X and Y, merged, then:
V(XY) > V(X) + V(Y)
Where:
V(XY) = Value of a merged firm
V(X) = Value of firm X, operating independently
V(Y) = Value of firm Y, operating independently
3. Tax Benefits
A profitable firm might use the target's loss to lower its tax obligations by purchasing a losing business. However, regulations in the United States and around the world limit the ability of profitable firms to buy loss-making enterprises to reduce their tax burden.
4. Diversification
To diversify their business, some corporations buy an established company rather than launch a new one. Starting a new one requires more time and resources than acquiring an existing business with solid growth potential.
The combination of two or more businesses involved at several points throughout the supply chain for a single commodity or service is referred to as a vertical merger.
For example, a company buys its vendor or distributor to avoid third-party services.
6. Cross-selling
Cross-selling is a sales tactic that involves marketing a similar product or service to an existing customer.
For example, a bank buys an insurance company to sell the insurance to its existing customers.
7. Acquire innovative technology
Companies frequently try to buy from other businesses to access their innovative technology and experience.
For example, Google purchased more than 30 artificial intelligence (AI) firms over the previous ten years for a total reported sum of close to $4 billion.
Buying Side M&A Process Steps
In mergers and acquisitions, the buy side comprises the acquiring firm and all those who work for it, like investment bankers, advisors, etc. Acquirers should have a solid understanding of "the buy side process," which refers to the whole process of purchasing a firm.
The buy-side process is composed of the following phases:
1. Identify the objective of the purchase
The acquisition process starts with establishing the motive of the purchase by the acquirer. Defining the goals for the acquisition of the target firm while taking the market, company financial situation, and future outlook into account is essential.
2. Establish search criteria
After identifying the motive of the purchase, the next step is to establish the key parameters to search in the target company, e.g., financial position, products or services offered, market presence, etc.
3. Search for potential target companies
Once the parameters have been established, the buyer can start looking for the right firms.
4. Outreach
At this step, the acquirer contacts the businesses that satisfy the search criteria. The buyer should issue a letter of intent (LOI) specifying its interest in pursuing a merger or acquisition and ask the target company for information to be used in valuation.
5. Valuation
In this step, the buyer examines the target business using various models, both as a standalone firm and a combined enterprise.
6. Negotiations and due diligence
Based on the valuation model, the acquirer makes an initial offer to the target company. Then, to finalize the deal's financial terms, both sides enter into negotiations. Also, thorough due diligence is essential before finalizing the deal.
7. Create purchase and sale contracts
After completing due diligence, the next step is to execute a final purchase and sale contract. The deal is officially finalized after all parties involved sign these agreements.
8. Final integration
After finalizing the acquisition, the integration team created by both firms begins the integration process.
Things to consider while buying a company
One of the best methods for achieving rapid growth in a business is through mergers and acquisitions. However, before proceeding with any merger or acquisition, one must consider a few critical factors.
1. Cash vs. stock
The buyer must first think about how to pay the target firm. Various considerations, such as the buyer's debt rating and cash availability, affect the decision between shares and cash.
Depending on the final payment method, the acquirer may reveal its view of its worth. For example, when an acquirer thinks its equity is overvalued, it often offers equity; when it believes it is undervalued, it typically offers a deal in cash.
The acquirer needs to ensure that the company it buys has enough working capital to satisfy the firm's demands after the closing, including commitments to clients and trade creditors.
3. Obtain an indemnity from the seller
Indemnification clauses in an M&A agreement will specify who is responsible for making payments when risks materialize and how much those payments will be.
It will assist the purchaser in defending itself against any responsibility and financial loss resulting from third-party claims related to the transaction.
4. Evaluate legal obligations
If a company purchases a company already in litigation, it may become a party to that case. Therefore, it's critical to determine if the company has any outstanding legal matters, such as judgments or liens, that it would be inheriting.
- In mergers and acquisitions, the business that bought or acquired another firm is referred to as the acquirer. And the company that was purchased is referred to as the acquiree.
- The process of acquiring a company is called acquisition. Buyers need to purchase more than 50 percent stake in the target company to take control of the management.
- There are different motives for acquiring the business, such as diversification, achieving economy of scale, acquiring innovative technology, creating financial or operational synergy, etc.
- The following steps are often included in buying or acquiring a company:
- Identify the objective of the purchase
- Establish search criteria
- Search for potential target companies
- Outreach
- Valuation
- Negotiations and due diligence
- Create purchase and sale contracts
- Final integration
- Different aspects, such as the choice of consideration and the inclusion of various clauses in the agreement, must be considered while purchasing a company.
Researched and authored by Dhruv Tyagi | LinkedIn
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