Acquisition

An acquisition is a transaction in which one company (the acquirer or buyer) purchases the shares or assets of another company (the target or seller). Unlike a merger, which combines the legal entities, an acquisition leaves the target either intact as a subsidiary or dissolves it into the acquirer’s operations. Acquisitions are the legal foundation of most corporate combinations.

Stock purchase vs. asset purchase

The two core structures of an acquisition differ in what the buyer receives:

Stock purchase. The buyer acquires shares from the target’s shareholders. The target company survives as a legal entity, now owned by the buyer. This structure is common when the acquirer wants to preserve the target’s brand, contracts, or licenses (which may not transfer automatically to a new owner). It is also simpler: one transaction with the shareholders, rather than assuming all the target’s liabilities. The downside is that the buyer inherits any hidden liabilities, undisclosed lawsuits, or tax exposures buried in the target’s history — hedged by careful due diligence and seller indemnities.

Asset purchase. The buyer acquires the target’s specific assets (property, equipment, intellectual property, customer contracts) and chooses which liabilities to assume. This is cleaner from a legal standpoint: the buyer does not inherit undisclosed problems. It is also tax-efficient for the buyer in some cases. The downside is that contracts and licenses may require consent to transfer, and the target becomes an empty shell (which the seller must liquidate, a tax-inefficient process for the shareholders).

Most large acquisitions use the stock purchase form because it is simpler and because the acquirer can invest time and resources in due diligence to understand and accept the risks.

The offer and negotiation

An acquisition begins when the acquirer’s board authorizes a bid. In a friendly acquisition, the buyer approaches the target’s board privately; if the board is receptive, it signs a nondisclosure agreement and the buyer conducts due diligence — a deep examination of the target’s financials, contracts, litigation, and operations.

If the parties reach a price and terms they both accept, they announce a definitive agreement (also called a purchase agreement). This is the legal contract governing the transaction: purchase price, representations and warranties, indemnification, conditions to closing, and the remedies if either side breaches.

The target’s board will often seek fiduciary-out language — the right to respond to a competing bidder or to change its recommendation if a superior offer appears. Many deals end with an auction in which multiple acquirers bid, sometimes sharply driving up the price.

In a hostile acquisition, the buyer bypasses the board and goes directly to shareholders via a tender offer, attempting to accumulate enough shares to take control without board blessing. This is rare (most hostile attempts fail) and expensive, but it can succeed if the target’s board is seen as negligent or if the acquirer makes an offer too tempting for shareholders to refuse.

Consideration and financing

The buyer must pay the agreed purchase price. Choices include:

• All-cash offers signal confidence and certainty of closing, but require the buyer to have or borrow large sums.
• All-stock offers preserve cash but dilute the buyer’s shareholders. The ratio of exchange (number of shares per dollar of acquisition price) is sensitive to the buyer’s own stock price.
• Mixed cash and stock is common, offering the target’s shareholders optionality.

The buyer’s funding sources include equity (raising capital from investors), debt (bonds or bank loans), or retained earnings. A buyer who borrows heavily to finance an acquisition is running a leveraged buyout.

Due diligence and representations

Before committing, the buyer investigates the target exhaustively: audited financials going back years, all contracts, environmental compliance, litigation, tax filings, customer concentration, key employee agreements, intellectual property ownership, and more. A target that is hiding problems — unbooked liabilities, inflated revenue, departing customers — will emerge during due diligence and either renegotiate the price or withdraw.

At closing, the seller makes representations and warranties: assertions that the target’s financials are accurate, contracts are valid, no lawsuits are pending, and so on. If a breach is discovered post-closing, the buyer can claw back funds from an escrow account (usually 10-15% of the purchase price, held for 12-24 months) or pursue indemnification. In practice, the escrow and indemnification clauses are a crude tool for managing post-close surprises; most sellers push to limit their exposure, and most buyers accept that some risk will be retained.

Integration and value creation

The acquirer’s entire thesis for the deal rests on value creation post-closing. This can take many forms: eliminating duplicate costs, bundling products and cross-selling, consolidating R&D, moving production to lower-cost facilities, or acquiring specialized talent or technology.

If the buyer overpays or the integration falters, the acquisition destroys value. Studies show that, on average, acquisitions underperform relative to the buyer’s cost of capital, particularly for large deals. Small acquisitions of specialized firms (e.g., a software company buying a niche tool) tend to perform better than large “roll-up” acquisitions in fragmented industries, which are often pursued more for scale than for genuine synergy.

Regulation

Acquisitions above size thresholds must be reported to antitrust authorities. In the US, the Federal Trade Commission and Department of Justice review deals under Hart-Scott-Rodino. They have 30 days to challenge; if they do, the deal may face divestiture demands, conduct remedies, or a legal battle. Foreign acquisitions of US companies, especially in defence, technology, or critical infrastructure, are also reviewed by CFIUS (Committee on Foreign Investment in the United States).

See also