What Is an Acquisition? Types and Examples

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An acquisition is a transaction in which one company buys most or all of another company’s shares or assets to gain control of it. Once the deal closes, the buyer (the acquirer) owns and directs the target’s assets and operations: its plants, staff, customer base, brands, contracts and market share.

What Acquisition Means in Business

The buyer pays the target’s owners with cash, its own shares, or a mix of both, and in return takes over the target’s economic value and its obligations. The acquired company may keep its name and operate as a subsidiary, or be folded into the parent and disappear as a separate brand.

The term covers deals of every size, from a regional accounting firm buying a two-partner practice to a telecom giant buying a media conglomerate, and most deals involve small and mid-sized firms. Larger transactions usually bring in investment banks, law firms and accountants as advisers.

How an Acquisition Works

Stock Purchase vs. Asset Purchase

There are two basic ways to structure the purchase of a company:

• Stock (share) purchase: The acquirer buys the target’s shares from its owners. The target remains the same legal entity, so its contracts, licenses and liabilities, including ones nobody has discovered yet, stay with it under new ownership.
• Asset purchase: The acquirer buys specific assets (equipment, inventory, intellectual property, customer lists) and agrees to take on only the liabilities named in the contract. The seller’s legal entity is left behind with whatever was excluded.

Buyers often prefer asset deals because they can avoid unknown liabilities. Sellers often prefer stock deals because they hand over the whole entity cleanly. Tax treatment also differs between the two and depends on the jurisdiction and the type of entity involved, such as a corporation versus an LLC.

How the Buyer Pays

The consideration in an acquisition is usually one of the following:

• Cash: funded from the acquirer’s balance sheet or with new borrowing. Target shareholders receive a fixed amount and exit.
• Stock: target shareholders receive shares of the acquirer according to an exchange ratio. They become part-owners of the combined company and share in its future performance.
• Mixed: part cash, part stock.

Typical Steps to Complete an Acquisition

Every deal has its own sequence, but a friendly acquisition of a company generally moves through these stages:

1. Strategy and screening. The acquirer defines what it wants (a market, a product, a capability) and identifies candidates.
2. Initial approach and valuation. The buyer makes a preliminary offer, often in a nonbinding letter of intent, which may include a no-shop clause barring the target from soliciting competing bids for a set period.
3. Due diligence. The buyer examines the target’s financial statements, debt, contracts, litigation, tax position, employees and operations.
4. Negotiation and definitive agreement. Price, structure, representations and warranties, and conditions to closing are set in a purchase or merger agreement.
5. Approvals. The target’s board, and often its shareholders, approve the deal, and regulators may need to clear it. In the U.S., the Hart-Scott-Rodino Act requires deals above a size threshold to be reported to the Federal Trade Commission and the Department of Justice before closing.
6. Closing. Payment is made and ownership transfers.
7. Integration. The acquirer combines systems, teams and operations to capture the benefits it paid for.

Interpreting Ownership Thresholds

The percentage acquired determines what the buyer actually controls. A stake above 50% gives control of shareholder votes on most matters and generally requires the acquirer to consolidate the target’s results into its own financial statements, with the portion it doesn’t own shown as a noncontrolling interest. Buying 100% gives full ownership, removing minority holders who could otherwise object to decisions or claim a share of profits. Smaller stakes give influence, not control, and are usually described as investments rather than acquisitions.

Worked Example: Pricing a Hypothetical Acquisition

This example is hypothetical and exists only to show the mechanics.

Company A wants to buy Company B, which has 10 million shares outstanding trading at $40 each. B also carries $100 million of debt and $20 million of cash.

Offer price and premium. A offers $50 per share. The acquisition premium is:

Premium = (Offer price − Pre-offer share price) ÷ Pre-offer share price = ($50 − $40) ÷ $40 = 25%

Equity purchase price. 10 million shares × $50 = $500 million paid to B’s shareholders.

Implied enterprise value. Because A also takes on B’s debt and receives its cash, the full cost of the business is:

Enterprise value = Equity value + Debt − Cash = $500M + $100M − $20M = $580 million

This is why analysts compare deals using enterprise value rather than share price alone: two targets with the same equity price can cost very different amounts once debt is counted.

Goodwill. Suppose the fair value of B’s identifiable assets minus its liabilities is $350 million. Under acquisition accounting (U.S. GAAP and IFRS both use this approach), the excess A pays over that figure is recorded as goodwill:

Goodwill = $500M − $350M = $150 million

Goodwill is not amortized under U.S. GAAP for public companies; it is tested for impairment, and if the acquired business underperforms, the acquirer writes it down and records a loss.

If A pays in stock instead. Assume A’s shares trade at $100. To deliver $50 of value per B share, the exchange ratio is 0.5 A shares per B share, so A issues 5 million new shares. If A already has 45 million shares outstanding, former B shareholders end up owning 5 ÷ 50 = 10% of the combined company. That stake rises or falls with A’s share price after the deal, while a cash payment would have locked in the $50.

Whether $500 million is a sensible price depends on the cash flows B is expected to produce. Buyers commonly build a discounted cash flow model, discount the projections at their weighted average cost of capital, and compare the result to the price paid. A positive net present value, after including expected cost savings and integration costs, is the financial case for going ahead.

Types of Acquisitions

Business combinations, whether acquisitions or mergers, are usually classified by how the buyer and target relate:

• Horizontal: The acquirer buys a competitor or another firm in its own industry at the same stage of the supply chain, such as one grocery chain buying another.
• Vertical: The acquirer buys a company along its supply chain, either upstream (a supplier or vendor) or downstream (a distributor, processor or retailer).
• Conglomerate: The acquirer buys a business in an unrelated industry, usually for diversification.
• Congeneric (market expansion): The acquirer buys a firm in the same or a closely related industry that offers different products or serves different customers.

Deals are also described by tone. Most are friendly: the target’s board agrees, recommends the deal to shareholders and cooperates on due diligence and terms. A hostile acquisition proceeds without the board’s consent, typically through a tender offer made directly to shareholders or by buying large blocks of stock on the open market until the acquirer holds a controlling interest.

The phrase strategic acquisition describes a purchase made by an operating company to strengthen its own business. It is often contrasted with a financial acquisition, where a buyer such as a private equity fund buys a company mainly to improve it and sell it later, judging returns with measures like internal rate of return.

Why Companies Make Acquisitions

Entering a New or Foreign Market

Buying an established company in another country or segment brings an existing workforce, brand, distribution network, licenses and customer relationships, which could take years to build from scratch.

Growth

A company that has hit physical, logistical or resource limits may find it more practical to buy capacity than to build it, or to buy a promising younger company that adds a new revenue stream. This is called inorganic growth, as opposed to organic growth from the company’s own sales.

Economies of Scale and Synergies

Combining two businesses can lower costs per unit through larger purchasing volumes, shared facilities and overlapping functions such as finance or IT. Revenue synergies, such as selling the acquirer’s products to the target’s customers, are the other half of the argument.

Reducing Excess Capacity and Competition

In an industry with too much supply, acquisitions can consolidate players, close the least productive capacity and leave fewer competitors. Antitrust authorities review such combinations because reduced competition can mean higher prices and lower-quality goods and services for consumers.

Gaining Technology or Talent

Buying a company that has already developed and proven a technology can cost less, and take less time, than building it internally. Some deals are mainly about acquiring a skilled engineering team or a patent portfolio.

What to Check Before an Acquisition

Company officers owe a fiduciary duty to shareholders, which includes thorough due diligence before committing to a purchase. Key questions include:

1. Is the price right? Valuation metrics vary by industry, and a deal can fail to create value when the price is well above what those metrics and the target’s cash flows support.
2. How much debt does the target carry? An unusually heavy load of liabilities is a warning sign. In some jurisdictions, when a target helps finance its own purchase, its directors may have to sign a whitewash resolution confirming the company remains solvent.
3. Is litigation excessive? A target fighting more legal claims than is typical for its size and industry may bring costly surprises.
4. Are the financials clear? Complete, well-organized financial statements let the buyer verify revenue, margins and obligations before closing.

Acquisition vs. Merger vs. Takeover

• Acquisition: One company buys and takes control of another. The acquirer survives as the parent, and the target becomes a subsidiary or is absorbed. The word usually suggests a cooperative deal.
• Takeover: Essentially the same transaction, but the word usually implies the target resisted or that the buyer is clearly the dominant party, as in a hostile takeover.
• Merger: Two companies, usually of broadly similar size and scale, agree to combine into a single entity, often with a new name drawing on both, expecting the combination to be worth more to shareholders than either alone.

Many deals announced as mergers are acquisitions in substance, with one side’s shareholders and management ending up in control.

Examples of Acquisitions

AOL and Time Warner (2000)

AOL, founded in 1985, had become the largest internet provider in the United States by 2000. That year it agreed to buy Time Warner, a long-established media conglomerate with publishing, television and film businesses, for $165 billion, at the time the largest merger on record. The combined AOL Time Warner was meant to dominate news, publishing, music, entertainment, cable and the internet.

The expected benefits did not materialize. AOL’s value fell as the dotcom bubble burst, and the combination lasted less than a decade:

• AOL Time Warner was dissolved through a spinoff in 2009.
• Time Warner operated as an independent company from 2009 to 2016.
• Verizon acquired AOL for $4.4 billion in 2015.

AT&T and Time Warner (2016 to 2018)

In October 2016, AT&T announced it would buy Time Warner for $85.4 billion. The U.S. Department of Justice sued to block the deal, arguing it would reduce competition and raise costs for consumers. The government lost in court, its appeal failed, and AT&T completed the acquisition in June 2018. AT&T later spun off its media assets, including the former Time Warner businesses.

The case shows two limits on acquisitions: regulators can challenge a deal even after it is agreed, and a buyer that wins approval can still later decide the combination does not fit.

Limitations and Risks of Acquisitions

• Overpaying. The premium paid to win a deal has to be recovered through synergies or growth. If those fall short, the acquirer may have to write down goodwill.
• Integration problems. Combining IT systems, product lines, compensation structures and corporate cultures can take years, and key employees and customers may leave in the meantime.
• Hidden liabilities. In a stock purchase, obligations missed in due diligence pass to the buyer.
• Financing strain. Debt-funded deals raise leverage and interest costs. Stock-funded deals dilute existing shareholders, as when B’s holders received 10% of the combined company in the example.
• Regulatory risk. Antitrust review can delay a deal, require the sale of certain businesses, or block it outright.
• Management distraction. A large acquisition consumes executive attention that would otherwise go to the existing business.

Investors judging an acquisition after the fact often look at whether returns on the combined capital improve, using measures such as return on equity, rather than whether revenue simply grew because two companies’ sales were added together.

The Bottom Line

Shareholders, executives and investors weighing a deal should look past the share price to the full cost, including debt taken on and the premium paid. An acquisition creates value only when the target's cash flows and realistic synergies justify the price after integration costs. Careful due diligence and post-deal measures like return on equity show whether a combination worked better than adding two companies' revenue together.