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
The main concern with acquisitions is that the majority of them destroy value. One reason is that the acquirer overpays, so that the market value of the acquirer declines. Another reason is that the acquirer does a poor job of managing the acquisition, so that key employees leave the acquiree. Yet another reason is that the firms are not well integrated, so that potential savings are not realized.