Acquirer

What Is An Acquirer?

An acquirer is a firm or corporation that acquired the entirety or a portion of another company. This process of acquiring a company is called acquisition. 

When a business wishes to grow, it can either start from scratch in a new market (Greenfield expansion) or purchase an established company (Brownfield expansion). Purchasing an established business offers the buying firm various advantages, such as market share and market presence.

To assume control over the business's management, the acquiring company must purchase more than 50% of the stock in the target company.

The term "acquisition" typically refers to a larger company buying out a smaller one. But sometimes, the smaller company may take over bigger, established businesses, this type of acquisition is usually called reverse acquisition.

In a hostile takeover, the purchasing business approaches the shareholder directly to purchase the company without the consent of the management. In a friendly takeover, however, management approves the takeover and assists in its implementation.

The purchase perception as "friendly" or "hostile" is heavily influenced by how the acquirer company conveys the proposed acquisition.

Acquirer's Motives

The most common explanation for mergers and acquisitions (M&A) activity is that acquiring corporations want to enhance their financial performance or minimize risk. 

However, in addition to these, various other reasons have been ascribed to purchasing a business, like diversification, tax benefits, acquiring technology, etc. 

Some of the motives for acquiring the company are as follows:

1. The economy of scale: The merged firm can benefit from the economy of scale by effectively cutting its fixed costs by eliminating redundant divisions or processes. As a result, lower costs achieve higher profit margins compared to the same revenue stream.
2. Synergy: Synergy often means that the merged business will become more profitable or expand quicker following the merger than the enterprises functioning individually. For example: If the two companies, i.e., X and Y, merged, then: V(XY) > V(X) + V(Y)
   • V(XY) = Value of a merged firm 
   • V(X) = Value of firm X, operating independently
   • V(Y) = Value of firm Y, operating independently
3. Tax Benefits: A profitable firm might use the target's loss to lower its tax obligations by purchasing a losing business. However, regulations in the United States and around the world limit the ability of profitable firms to buy loss-making enterprises to reduce their tax burden.
4. Diversification: To diversify their business, some corporations buy an established company rather than launch a new one. Starting a new one requires more time and resources than acquiring an existing business with solid growth potential.
5. Vertical integration: The combination of two or more businesses involved at several points throughout the supply chain for a single commodity or service is referred to as a vertical merger. For example, a company buys its vendor or distributor to avoid third-party services.
6. Cross-selling: Cross-selling is a sales tactic that involves marketing a similar product or service to an existing customer. For example, a bank buys an insurance company to sell the insurance to its existing customers.
7. Acquire innovative technology: Companies frequently try to buy from other businesses to access their innovative technology and experience. For example, Google purchased more than 30 artificial intelligence (AI) firms over the previous ten years for a total reported sum of close to $4 billion.

Buying Side M&A Process Steps

In mergers and acquisitions, the buy side comprises the acquiring firm and all those who work for it, like investment bankers, advisors, etc. Acquirers should have a solid understanding of "the buy side process," which refers to the whole process of purchasing a firm.

The buy-side process is composed of the following phases:

1. Identify the objective of the purchase: The acquisition process starts with establishing the acquirer's motive for purchasing the target firm. Defining the goals for the acquisition while considering the market, company financial situation, and future outlook is essential.
2. Establish search criteria: After identifying the motive of the purchase, the next step is to establish the key parameters to search in the target company, e.g., financial position, products or services offered, market presence, etc.
3. Search for potential target companies: Once the parameters have been established, the buyer can start looking for the right firms. 
4. Outreach: At this step, the acquirer contacts the businesses that satisfy the search criteria. The buyer should issue a letter of intent (LOI) specifying its interest in pursuing a merger or acquisition and ask the target company for information to be used in valuation.
5. Valuation: In this step, the buyer examines the target business using various models, both as a standalone firm and a combined enterprise.
6. Negotiations and due diligence: Based on the valuation model, the acquirer makes an initial offer to the target company. Then, to finalize the deal's financial terms, both sides enter into negotiations. Thorough due diligence is also essential before finalizing the deal. 
7. Create purchase and sale contracts: After completing due diligence, the next step is to execute a final purchase and sale contract. The deal is officially finalized after all parties involved sign these agreements.
8. Final integration: After finalizing the acquisition, the integration team created by both firms begins the integration process.

Things to consider while buying a company

One of the best methods for achieving rapid growth in a business is through mergers and acquisitions. However, before proceeding with any merger or acquisition, one must consider a few critical factors.

Cash Vs. Stock

The buyer must first think about how to pay the target firm. Various considerations, such as the buyer's debt rating and cash availability, affect the decision between shares and cash.

Depending on the final payment method, the acquirer may reveal its view of its worth. For example, when an acquirer thinks its equity is overvalued, it often offers equity; when it believes it is undervalued, it typically offers a deal in cash.

Working Capital Adjustment

The acquirer needs to ensure that the company it buys has enough working capital to satisfy the firm's demands after the closing, including commitments to clients and trade creditors.

Obtain an Indemnity from the Seller

Indemnification clauses in an M&A agreement will specify who is responsible for making payments when risks materialize and how much those payments will be. 

It will assist the purchaser in defending itself against any responsibility and financial loss resulting from third-party claims related to the transaction.

Evaluate Legal Obligations

If a company purchases a company already in litigation, it may become a party to that case. Therefore, it's critical to determine if the company has any outstanding legal matters, such as judgments or liens, that it would be inheriting. 

Researched and authored by Dhruv Tyagi | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

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