External growth - Acquisition

What is an acquisition?

Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.

1.  An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.

2.  This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.

3.  As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.

Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller.  In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.

Such deals are usually financed quite heavily with loasn and other deals and are often followed by a very vigorous pruning of parts of the acquisition to repay the financing involved.  This is known as asset stripping and is rarely intended to achieve growth of an established business, but rather functions as a financial dealing that will generate cash for further enlargement.

HOSTILE ACQUISITIONS OR TAKEOVERS

Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.

When talking about mergers, such phrases as: "teamwork," "sharing," and "mutual benefit" are appropriate; some expressions used when considering hostile takeovers might be:

• "We have bought you."
• "Do as you are told."
• "Our way is best."

One of the keys to success is not to keep the newly purchased company at "arm's length" but to actively create value from the new relationship.   The underlying idea of growth through acquisition is to utilize the resources you targeted at the investigation stage as quickly as possible to enable your own business to grow and flourish. 

Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence.  This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.

Using the due diligence procedure to arrive at incisive answers to the many questions needed, to making the decision to acquire, represents the exemplary use of due diligence.

VALUING THE ACQUISITION

There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision.  You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:

• The history of the business
• The current performance
• The financial situation
• The condition of the premises
• Intangible assets
• Employees

Once you have considered all of these factors, you can then decide

• how much you think the business is worth, and
• how much you are prepared to offer, if you decide to proceed.

THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:

Company "C" shares ----> ----> ----> Company "A" shares ---->> Larger company "A" shares