Acquisition

Why Acquisition is included in the list on www.corporate-actions.net

Acquisition is included in this list of Corporate Event Types because it is a term that is often used and depending on where you are in the world the word “Acquisition” means different things to different people. When searching on the internet the word “Acquisition” is also often showing up. From an accounting, legal or business strategy point of view, the word “Acquisition” can certainly be seen as a Corporate Actions Event and therefore the use of the term is legitimate even though as such it is not recognised as an event type by SWIFT and SMPG.

In general, companies will aim to grow. Growth can be achieved organically (the company simply grows their existing company) or inorganically (by acquiring other already existing businesses and integrate them with their own).

In order to execute an acquisition strategy, the acquiring company may use several means: a MERGER, a Takeover Bid  (usually by announcing a TENDER OFFER or an EXCHANGE OFFER) or a SCHEME OF ARRANGEMENT, which are all Corporate Actions Events.

It seems that in the United States an Acquisition should be seen as a “friendly” action (alongside a MERGER)  whereas a Takeover is perceived as more “hostile” in the sense that the target company does not want to be taken over (for the offer price). In the UK for example, a “Scheme of Arrangement” could be seen as the UK equivalent of that.

As the Acquisition can be seen as a container word that covers several Corporate Action Events in the lists from SWIFT and SMPG, it is worth it to work it out in a bit more detail:

An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders. This is also known as a controlling stake.

Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.

Why Make an Acquisition?

Companies acquire other companies for various reasons.

For example Tobacco Companies may look into acquiring Cannabis producers to get access to new markets in countries where it is now legalised.

The combined production may lead to better utilisation of machines for example

When a company is putting all of its eggs in one basket, in other words is becoming too dependent on the sales of one particular product, it may become perceived as too risky an investment. By adding different products to its portfolio it can spread the risks.

Greater Market Share provides higher bargaining power with clients over price.

For example when a Telephone Company can deliver content in the form of TV shows etc then this can add synergy for the customer.

If for example two companies both have their own computer systems, then they can dispose of one of the systems and migrate all to the surviving computer system. Hence reducing the costs for the combined company.

If the company’s strategy is to offer a wider range of products then buying a product line can add value to its offering.

If a company wants to expand its operations to another country, buying an existing company in that country could be the easiest way to enter a foreign market. The purchased business will already have its own personnel, a brand name, and other intangible assets, which could help to ensure that the acquiring company will start off in a new market with a solid base.

Perhaps a company met with physical or logistical constraints or depleted its resources. If a company is encumbered in this way, then it’s often sounder to acquire another firm than to expand its own. Such a company might look for promising young companies to acquire and incorporate into its revenue stream as a new way to profit.

If there is too much competition or supply, companies may look to acquisitions to reduce excess capacity, eliminate the competition, and focus on the most productive providers.

Sometimes it can be more cost-efficient for a company to purchase another company that already has implemented a new technology successfully than to spend the time and money to develop the new technology itself.

When it is hard to get qualified people, it can be beneficial to have personnel from another company joining the company. With the increase in Workforce comes an increase in career chances for individuals.

When one company buys another company which is a supplier in the same industry.

Create an Acquisition Team

The buyer will often form a team in which typically the following roles need to be filled:

This is mostly the CEO of the company.

Handles the financial side of the project, and assesses the financial  aspects of the investment opportunity in acquiring the target company.

Deals with all the rules around transferring ownership and handles all legal documentation that needs to be written and signed

Is responsible for the staffing side of the transaction. The prime task lies in planning how the staff of the target company is going to be integrated in the buying company.

Assesses how the technical infrastructure of both companies can be combined.

Can promote the transaction to the public

Deals with with planning the operational integration and executing it after the deal.

Selecting a Target Company

Before making an acquisition a company should evaluate whether its target company is a good candidate.

The buyer should not pay a price that is too high.

The debt of the target company will end up at the acquiring company. Taking on too much debt is a negative thing and should be reflected in the price.

The buyer would have to look very closely at what legal claims there are currently filed against a target company because these could lead to large future liabilities that may not be in the balance sheet yet.

It’s not always easy to put a value on a company and if the Financial Statements are in chaos then this is a warning signal. There’s no point in buying another company just to find out about nasty surprises afterwards.

Which Corporate Actions Event Type to choose

In order to execute an acquisition strategy the acquiring company will have to choose a way via which it will achieve its goals. Often it will hire an Agent Bank who will advise them on and help them with choosing the best options. Once the target company has been identified, there is the moment the companies need to get in contact with each other. With Agents involved this could have already been a gradual process for a while, but it can also be that the offer comes “out of the blue”. The buyer will have to contact the board of the target company and try to convince them to agree to the transaction. Often board members of the target company are offered incentives to support the deal, like for example positions on the board of the buyer. If both parties agree, then a friendly transaction can be initiated subject to approval by shareholders (of both companies). As stated above, the Merger, Tender Offer or Exchange Offer are good candidates, but some countries also know the Scheme of Arrangement.

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