Step acquisition definition
/What is a Step Acquisition?
A step acquisition occurs when the acquiring entity obtains control over an entity for which it already held a non-controlling interest. This situation may arise when the eventual acquirer has an option to buy the remaining shares of a business that it does not already own.
Advantages of a Step Acquisition
There are several advantages for an acquirer in using the step acquisition approach. They are as follows:
Range of options. This approach gives the acquirer a range of options for how to proceed with an acquisition, which may range from quietly backing out of the transaction to slowly piling up an increasing interest in the acquiree. This step-by-step approach allows the acquirer to incrementally examine the viability of the deal, and pull out if it appears that the arrangement is becoming too expensive or complex.
Influence. By gradually building up its percentage interest in the acquiree, the acquirer can begin to exert more control over it, which allows the acquirer’s managers to gain a better understanding of how resistant the current owners are to change.
Financial commitment. The acquirer can spread out its funding needs related to the acquisition, rather than having to come up with the full amount of the required funds at the start of the acquisition process.
Terms Similar to Step Acquisition
A step acquisition is also called a piecemeal acquisition.
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Example of a Step Acquisition
ABC Corp, a large technology company, wants to acquire XYZ Ltd, a smaller software firm. Instead of buying 100% of XYZ Ltd at once, ABC Corp gradually increases its ownership over time, using the following steps:
In Year 1, ABC Corp buys 20% of XYZ Ltd for $10 million. XYZ Ltd is treated as an investment, and ABC records it using the fair value method in its financial statements.
In Year 3, ABC Corp buys an additional 30% for $25 million, bringing its total stake to 50%. Now, ABC has significant influence, so it switches to the equity method of accounting. XYZ Ltd is now considered an associate company of ABC Corp.
In Year 5, ABC Corp acquires the remaining 50% for $50 million. Now, ABC fully owns XYZ Ltd, making it a subsidiary. ABC consolidates XYZ’s financials into its own statements using the acquisition method.