Acquisition definition
/What is an Acquisition?
An acquisition occurs when a business gains control over another entity. An acquisition is typically achieved by acquiring a majority of the voting stock held by investors, sometimes over the objections of the managers of the acquiree. It may be necessary to pay a premium over the market price in order to convince investors to sell their shares. The payment for an acquisition can be in cash, debt, or the stock of the acquirer.
Accounting for an Acquisition
The acquirer accounts for an acquisition by allocating the purchase price to the fair value of the acquiree's assets and liabilities. Any excess amount of the purchase price is classified as goodwill, which is considered a long-term asset. Goodwill is regularly examined to see if the asset has been impaired. If so, the recorded amount of the goodwill is written down.
Once an acquisition has been completed, the acquirer consolidates the financial statements of the acquiree with its own financial statements.
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Advantages of Acquisitions
There are a number of reasons why a business might want to engage in acquisition activities, including the following:
To achieve greater economies of scale. This is the benefit of higher production volumes and greater experience with producing goods, which can gradually drive down the cost of the goods being sold by the combined entity. This gives the surviving company higher margins, which it may use to reduce prices, thereby forcing competitors out of the market.
To acquire a valuable brand
To acquire intellectual property
To acquire key customers
To become more geographically diverse
To cut costs by combining operations
To enter a market niche more quickly
To fill holes in the corporate product line
To keep the acquiree away from other potential acquirers
To reduce the amount of available production capacity in the industry
Disadvantages of Acquisitions
There are several substantial disadvantages associated with acquisitions, which are as follows:
Cultural integration challenges. Merging two companies often brings together different corporate cultures, which can lead to conflict, miscommunication, and decreased employee morale. Employees may resist change or feel uncertain about their roles in the new organization. These cultural clashes can hinder collaboration and reduce overall productivity if not managed properly.
High acquisition costs. Acquisitions typically involve significant upfront financial investments, including purchase price, legal fees, advisory costs, and integration expenses. These costs can strain the acquiring company’s cash flow or lead to increased debt. If the acquisition does not deliver expected returns, the financial burden may outweigh the strategic benefits.
Redundancies and layoffs. After an acquisition, overlapping roles and departments often lead to job cuts as the combined company seeks efficiency. While this may reduce costs, it can also damage employee morale and lead to the loss of valuable talent. Layoffs can also attract negative publicity and affect the company’s reputation.
Regulatory and legal hurdles. Acquisitions are subject to complex regulatory approvals, antitrust laws, and compliance requirements, which can delay or derail deals. Navigating these legal processes often requires time-consuming due diligence and costly expert consultation. Failing to meet regulatory expectations can result in penalties or blocked transactions.
Unrealized synergies. Many acquisitions are justified by expected synergies—cost savings, revenue growth, or operational improvements—but these are often harder to achieve than anticipated. Poor integration planning or execution can cause these synergies to fall short. When anticipated benefits don’t materialize, the acquisition may fail to add value or even harm the acquiring company’s performance.