When is acquisition appropriate

Table of Contents Expand. What Is an Acquisition? Why Make an Acquisition? Acquisition, Takeover, or Merger? Evaluating Acquisition Candidates. The s Acquisitions Frenzy. Real-World Example of Acquisitions. Key Takeaways An acquisition occurs when one company buys most or all of another company's shares. An acquisition is often friendly, while a takeover can be hostile; a merger creates a brand new entity from two separate companies.

Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Hostile Takeover Definition A hostile takeover is the acquisition of one company by another without approval from the target company's management.

Friendly Takeover Definition A friendly takeover occurs when a target company's management and board of directors agree to a merger or acquisition proposal by another company.

What Is a Predator? A predator is a powerful, financially strong company that grabs up another weaker company in a merger or acquisition. Pac-Man Defense The Pac-Man defense is a defensive tactic used by a targeted firm in a hostile takeover situation. It also focuses valuation of the acquisition candidate as an ongoing business of the parent rather than on its historical performance as an independent entity.

If time or other factors prevent placing operating managers on the negotiating team, a company may use other methods to ensure consideration of organizational fit. Our research uncovered two interesting approaches in which companies encouraged different sets of advisers to work together. The consulting teams were not told that an acquisition was under consideration until after they had analyzed the two organizations independently and presented initial reports.

The prospective buyer then brought the consulting teams together to explore the feasibility of integrating the two companies via acquisition.

Another corporation established two in-house analytical teams, one supporting the acquisition and the other opposing it. The groups helped ensure that the company gave enough time and attention to critical discussion of the acquisition.

Many companies overlook the valuable role that an integrator can play in the acquisition process. Formalizing such a role can be an important step to counteract the effects of fragmented perspectives. One approach is to identify a gadfly who can watch out for process-related problems.

If such a person lacks decision-making authority, however, his or her effectiveness may be limited, and other managers may dismiss him or her as the house nay sayer. Another, more promising approach is to make sure key decision makers can remain as detached evaluators of the process while becoming involved at key junctures to assure integration of information and balance of perspectives.

A third solution is to have two influential company officials adopt complementary roles, one heading the acquisition effort and the other focusing on process or integration problems. We make these suggestions to emphasize the importance of ensuring high-level advocacy for integrating the two businesses.

While the range and volume of acquisitions in the United States make it difficult to generalize about managing the acquisition process, the experiences of the Loral Corporation, a highly profitable leader in the defense electronics industry, suggest some useful lessons. Within several years, Loral divested nearly all of the businesses outside its core focus on electronics. Such policies can have clear payoffs.

When Xerox Corporation announced that it would divest its Electro-Optical Systems division, Loral won over other bidders. We sent an executive there for one day because we already knew the industry.

Xerox never thought we were serious until we made the successful offer. Loral relies on executive experience and discipline to ensure that objectives are met, to slow down the process, and to counterbalance the pressures for quick analysis and rushed decisions.

Schwartz is also prepared to call off or restructure deals at a late date. Although Loral had invested much effort in arranging the deal, minimum standards were set for the acquisition to proceed. Using these standards, planners fashioned a new proposal and presented it to Narda with a frank explanation for the reasons behind the action.

In the end, the transaction was made and both companies avoided hard feelings and unreachable goals. Then it comes down to people. So I think the investment you make before you make your deal—in terms of people relationships—is very significant. Be clear and firm about key objectives and procedures, but remain flexible about nonessentials. Communicate these distinctions explicitly to the target company.

Involve few people in analyzing and carrying out the acquisition, but try to involve those who will work with the business later. Researchers and financial analysts usually describe acquisitions as calculated strategic acts. In sharp contrast, people directly involved in the acquisition process often point to powerful forces beyond managerial control that accelerate the speed of the transaction. Pressure to close a deal quickly can prevent managers from considering strategic and organizational fit issues completely and dispassionately and can lead to premature conclusions.

The thrill of the chase blinded pursuers to the consequences of the catch. Various forces increase momentum in the acquisition process. First, decision makers need secrecy and intense concentration. Once the possibility of a deal becomes known in a company, business as usual virtually ceases, and a period of uncertainty sets in for shareholders, employees, suppliers, customers, and competitors.

In such situations, the time given to analyzing data and considering a wide range of options tends to dwindle as people try to consummate the arrangements before news is leaked that could cause disruptions internally or in the financial markets. The personal and organizational stakes involved in an acquisition are greater and more uncertain than those most managers face in their day-to-day work. As a result, managers involved in the process tend to isolate themselves from other company activities, a reaction that heightens feelings of tension and uncertainty.

The strain everyone feels tends to worsen the effects of already intense time pressures, which augments still further the desire to wrap things up.

Second, acquisition analyses and negotiations frequently require a substantial, uninterrupted time commitment from participants. The more managers identify with an acquisition, the less likely that they will be able to consider it objectively and accept criticism that could slow it down.

Feeling that they have put their reputation for sound, decisive judgment on the line by initiating the process, senior executives may hurry to complete the deal, in part to justify their earlier decision to pursue the target. Third, each major player in the acquisition process has distinctive interests that tend to increase momentum to finish things up.

These players include senior executives in the acquiring and target companies, staff and operating managers in both organizations, and outside advisers. For managers in the acquiring company, the target may be a stepping-stone to personal rewards and advancement as well as a device to enhance their own reputations. In many companies, for example, after the board authorizes the CEO to begin an acquisition search, a task force or committee is established. This committee then develops a list of criteria and screens a variety of possibilities, often with the help of an investment banker.

This group may think it has failed if it finds no candidate. Moreover, task force members may see brighter career opportunities for themselves as a result of negotiating an acquisition successfully. Managers can never fully reduce nor should they ever eliminate the uncertainty or opportunities associated with performance and career expectations.

But senior executives should recognize the impact this factor has on their companies and ensure that, whenever possible, career opportunities and rewards are based on performance that extends beyond any single acquisition. For example, an aging electronics company made a series of acquisitions to gain access to new and different technologies.

Because some managers viewed these new subsidiaries as the only path for growth in the company, they arranged transfers to the recent acquisitions and took with them important operating people from their old divisions.

Other players whose interests are at stake include outside advisers, especially investment bankers. Because they are compensated on a transaction basis, their fee does not vary dramatically if a deal takes three weeks or nine months to close. It is in their interest, therefore, to conclude the process quickly—in part because, within investment banks themselves, merger and acquisition activity involves no risk capital.

Indeed, merger and acquisition work offers a more certain path to profitability than do traditional corporate finance or security sales and trading aspects of the investment banking business. This situation may create a serious problem: companies use these outside experts to provide objective, professional advice, yet these advisers face a conflict between representing their own interests and those of their clients. Of course, there are some restraints on increasing momentum to make deals.

Prevailing laws and most corporate bylaws require the board of directors to approve acquisitions. Perhaps board members assume that management has already evaluated these issues adequately. Most companies do not make acquisitions sequentially with several acquisitions coming close together. As a result, few companies have opportunities to learn over time. When a company has experience in integrating acquisitions successfully, this familiarity may serve to slow momentum. Of course, it is not always possible or desirable to slow down the acquisition process.

Once a potential candidate is identified, managers are faced with the very real threat that another company could buy it. Indeed, moving quickly to acquire another company is appropriate in many cases. If you're ready to step back from the day-to-day efforts of running a company, consider allowing your company to be acquired.

Large companies are constantly looking to acquire small businesses in their market; the acquisition carries all the same benefits as a merger. If you find a larger buyer in your market and you can show how your business will increase its share of the market, you stand to get paid out handsomely. Based in San Diego, Calif. By Madison Garcia.

IPO Advantages There's no better way to get a huge capital injection than to engage in an initial public offering. The most significant shareholder benefits from related acquisitions accrue when the special skills and industry knowledge of one merger partner can help improve the competitive position of the other.

It is worth stressing again that not only must these special skills and resources exist in one of the two partners but they must also be transferable to the other. Lest such identification appear too obvious or elementary, consider the dilemma that Ciba-Geigy Corporation faced in its acquisition of Airwick Industries. Its corporate objectives were to continue to improve its long-term profits through new products derived from its extensive research program and from acquisitions in related fields.

The search—a model of intelligent acquisition behavior—involved reviewing more than 18, companies in-house, along with an outside computer review. All told, about companies came through this screen and were scrutinized more closely.

Among these was Airwick Industries. Over the previous five years, the rapidly growing air freshener market had become extremely competitive. Johnson had all entered the market. The task force reported that acquisition of Airwick would be an attractive way of entering the household products business, if Ciba-Geigy had a strategic interest in this area.

The tentativeness of this conclusion suggests that the acquisition guidelines failed to provide sufficient criteria for a final choice of the acquisition candidate. Achieving this fit involves exploring a range of possible choices. Relative to many other companies, Ciba-Geigy did not require nor perhaps encourage an advanced marketing program.

Specifically, such businesses would:. Manufacture products by chemical processes requiring a high degree of engineering or technical know-how. Ciba-Geigy would have steered away from businesses that were either marketing intensive or involved in the production of commodity chemicals, including many of those businesses it had targeted.

Alternatively, if Ciba-Geigy had wished to add important skills and resources in new functional activities—a related-complementary diversification strategy—attractive acquisition candidates would have experience in large-scale manufacturing, marketing, and distribution of chemically based products. They would be businesses:. Whose key success factor is marketing oriented.

Lacking precise diversification objectives and acquisition guidelines, the task force analyzed Airwick according to related-supplementary criteria, which required skills similar to those of Ciba-Geigy.

Naturally, the task force felt the need to hedge its recommendations until it had more meaningful acquisition guidelines for marketing-oriented companies. The lesson of this case is simple but fundamental.

Companies pursuing a strategy of growth into related fields must decide whether to expand existing skills and resources into new product markets or whether to add new functional skills and resources. The principal benefits for companies pursuing unrelated acquisitions stem from improved corporate management of working capital, resource allocation, or capital financing and lead to a cash flow for the combined company that is either larger or less risky than its component parts.

Once again, lest this appear too obvious, consider the uncertainty faced by General Cinema Corporation. By the mids, the company had reduced the large amount of debt it had incurred while actively acquiring soft drink bottlers. All this suggests some very general related-diversification strategy. Its soft drink bottling business is not closely related to the multiple-auditorium theater business in either a product-market or a functional skill sense, nor were several of its previous diversification attempts, which involved bowling alleys, FM radio stations, and furniture retailing.

By incurring high levels of financial leverage to increase its risk level, rather than assuming either operating or competitive risk, General Cinema was creating value for its shareholders.

In addition, the competitive positions of both the theater and bottling divisions were especially strong due to the franchise nature of both markets.

Since both movie theaters and bottling operations are capital-intensive businesses, their cash flows, relative to many industries, were high. In short, General Cinema showed many of the characteristics of a well-managed, unrelated diversifier. Thus, additional acquisition guidelines for General Cinema, reflecting an unrelated-active strategy, could be as follows:. The acquisition candidate should be asset intensive.

The assets could either be fixed, such as buildings and equipment, or intangible, such as trademarks, franchises, or goodwill. This implies products relatively immune to technological obsolescence or markets not exposed to significant levels of internal competition or external pressure. However, total invested capital debt, leases, and equity should be at least three times the equity investment.

The requirements for relative immunity to market change and a high growth rate imply that the acquisition would be service oriented rather than technology based. For senior managers to feel comfortable with the acquisition, they should market or distribute products or services to the consuming public. Since General Cinema lacks surplus general managers, the acquisition should have good operating managers. Successful integration into General Cinema requires that the acquisition be adaptable to intensive planning and financial controls.

Most of the guidelines are as applicable to companies managing unrelated acquisitions passively as to companies operating actively. However, the criteria requiring integration into an intensive planning and financial control system and a corporate-managed resource allocation process embody those elements found in most actively managed portfolios of unrelated businesses.

The Ciba-Geigy and General Cinema cases clearly show how closely tied acquisition guidelines should be to overall corporate strategy. Effective acquisition guidelines must reflect carefully thought-out corporate objectives. In situations where the objectives and especially diversification objectives lack specificity or relevance, acquisition guidelines will be vague and have limited use in structuring a process for productive acquisition search and screening.