Hey there! Welcome back once again. Have you ever wondered why do many acquisitions succeed just as many who fail? These failures are mainly due to the application of incorrect strategies.
To be successful, business acquisition strategies must demonstrate ways to grow and expand without assuming too much risk. This can be possible if the business owners have intimate knowledge about the industry. Moreover, inorganic growth provides opportunities to leverage cost synergies and build economies of scale. Let us now walk through the different types of acquisitions.
There are mainly six types of Acquisition strategies that exist in the Business world, which are as follows:
- General acquisition:
- The first type of acquisition strategy is called the general strategy in which the target entity conjoins into the acquiring party, effectuated under the general acquisition statutes of the company law.
- This is called “general acquisition” in the sense that it is not specific and can potentially apply to all acquisitions.
- Parent-subsidiary acquisition:
- Parent-subsidiary acquisitions are the most used acquisition type. Parent-subsidiary acquisitions are of two types which are:
- Parent-subsidiary (upstream acquisition) A parent-subsidiary upstream acquisition is the conjoining of a subsidiary business entity into its parent entity, with the parent business entity surviving.
- Parent-subsidiary (downstream acquisition) A parent-subsidiary downstream acquisition is the conjoining of a parent into its subsidiary. The subsidiary survives, and the parent disappears.
- Triangular Acquisition:
- The purchasing company creates a wholly-owned subsidiary, which in turn conjoins with the selling company. Then the selling company winds up its business completely.
- The purchasing company is the subsidiary’s only remaining stakeholder. A triangular acquisition can lessen the necessity to secure shareholder approval for an acquisition depending on the nature of the agreement.
Triangular Acquisition is generally of three types:
- Forward triangular acquisition:
- This is an acquisition arrangement where the target selling company and the purchasing company’s subsidiary combine in a forward triangular acquisition, with the subsidiary remaining and the target vanishing.
- The target becomes a wholly-owned subsidiary of the purchaser because of the sale. The purchaser would not assume the liabilities of the target since the acquisition was between the target and the subsidiary.
- If the purchaser had directly combined with the target, the acquirer would have accrued the target’s liabilities.
- In a reverse triangular acquisition arrangement, the target company survives as a division of the purchasing company merges with/into the target company.
- The acquired business continues to operate as a separate corporation, and the purchasing company’s subsidiary becomes part of it.
- This arrangement achieves the same result as the purchasing company buying all the acquired company’s stock and not taking on the liabilities.
- This does not require acquiring a large number of shareholders’ stakes directly. Other benefits include the target’s assets not being moved to another company because they remain with the target.
- A multi-entity acquisition involves purchasing of (cross-entity or inter-entity merger) different business entity statutes and different kinds of ownership interests.
- In this type of acquisition, stocks are purchased of the target company from its stockholders.
- The target company will remain intact, but it will now be under new ownership. The purchaser buys all or most of the seller’s voting shares, hence fundamentally owns all the assets and liabilities of the seller including the contracts, intellectual property.
- Stock purchases are typically beneficial to sellers as it is less disruptive to the day-to-day business of the company.
- The seller continues to oversee the operations, making the integration less expensive and shorter.
- In an asset purchase acquisition, the purchaser buys only the assets and liabilities that are specified in the purchase agreement.
- Buyers often use an asset purchase when they want to acquire a single business unit or division within a company. After the sale, the selling entity will continue to exist legally though in many cases, it ends its operations as soon as the deal closes.
- Reverse acquisition happens when a private company conjoins with an existing public company, thereby installing its management and taking all the necessary measures to maintain the public listing.
- This acquisition helps in avoiding the high costs and lengthy regulations associated with an initial public offering (IPO).
Let us now understand what is the major difference between merger, acquisition, and takeover?
Well, Merger describes a transaction where both the business parties involved come together and combine the operations to form a brand-new business entity. On the other hand, an acquisition describes a transaction where both the business entities co-operate. Takeover arises where the target business entity opposes the transaction.
Post-acquisition, the parent company usually must go through acquisition integration which is the process of integrating all the systems and operations of the target company with the parent company. The parent company is also required to follow acquisition accounting guidelines, which is a branch of financial accounting that describes how assets, liabilities, and goodwill should be reported by the buyer on its consolidated financial statements.
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