An acquisition deal involves a business buying and taking over control of another business, absorbing the target company’s assets and sometimes liabilities. Typically, ownership is transferred through the exchange of stock. Mergers and acquisitions are often a precursor to larger business transformation projects. They can be a way for businesses to tap into new markets more quickly, especially internationally.
The most important aspect of an acquisition deal is the due diligence phase, which involves researching a prospective target business and its finances. The goal is to identify any weaknesses that need to be corrected in order to generate value from the acquisition. This could include everything from soon-to-expire contracts with large customers to regulatory issues that need to be addressed.
Once the due diligence process is complete, the acquiring company can formulate and agree to a deal. This can take the form of a share purchase agreement (SPA) or an asset purchase agreement. The former involves the purchasing of shares of the target, while the latter takes over only the assets and liabilities specified in the contract.
Some companies may acquire a competitor in order to gain a foothold in a new market, for example, Coca-Cola acquiring a local bottling company, or Google acquiring a search engine competitor. This is called geographic diversification, and it’s one of the most common motives for M&A deals.
Other reasons for M&A include the need to reduce surplus capacity, a desire to eliminate a business rival, or a need to speed up implementation of a new technology. It can also be cheaper to buy and integrate a promising startup than to spend resources developing an internal solution. Federal watchdogs regularly monitor acquisitions to ensure that they don’t lead to higher prices or lower-quality products.