We Buy Profitable & Distressed Businesses
By Will Kenton Fact checked by Ariel Courage Reviewed by Margaret James on June 14, 2020
An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.
We mostly hear about acquisitions of large well-known companies because these huge and significant deals tend to dominate the news. In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies.
They may seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings. Other reasons for acquisitions include those listed below.
Officers of companies have a fiduciary duty to perform thorough due diligence of target companies before making any acquisition.
In general, "acquisition" describes a primarily amicable transaction, where both firms cooperate; "takeover" suggests that the target company resists or strongly opposes the purchase; the term "merger" is used when the purchasing and target companies mutually combine to form a completely new entity. However, because each acquisition, takeover, and merger is a unique case, with its own peculiarities and reasons for undertaking the transaction, use of these terms tends to overlap.
Friendly acquisitions occur when the target firm agrees to be acquired; its board of directors (B of D, or board) approves of the acquisition. Friendly acquisitions often work toward the mutual benefit of the acquiring and target companies. Both companies develop strategies to ensure that the acquiring company purchases the appropriate assets, and they review the financial statements and other valuations for any obligations that may come with the assets. Once both parties agree to the terms and meet any legal stipulations, the purchase proceeds.
Unfriendly acquisitions, commonly known as "hostile takeovers," occur when the target company does not consent to the acquisition. Hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition. Even if a takeover is not exactly hostile, it implies that the firms are not equal in one or more significant ways.
As the mutual fusion of two companies into one new legal entity, a merger is a more-than-friendly acquisition. Mergers generally occur between companies that are roughly equal in terms of their basic characteristics—size, number of customers, the scale of operations, and so on. The merging companies strongly believe that their combined entity would be more valuable to all parties (especially shareholders) than either one could be alone.
Before making an acquisition, it is imperative for a company to evaluate whether its target company is a good candidate.
In corporate America, the 1990s will be remembered as the decade of the internet bubble and the megadeal. The late 1990s, in particular, spawned a series of multi-billion-dollar acquisitions not seen on Wall Street since the junk bond fests of the roaring 1980s. From Yahoo!'s 1999 $5.7-billion purchase of Broadcast.com to AtHome Corporation's $7.5-billion purchase of Excite, companies were lapping up the "growth now, profitability later" phenomenon.1 2 Such acquisitions reached their zenith in the first few weeks of 2000.
AOL Inc. (originally America Online) is the most publicized online service of its time, and often extolled as “the company that brought the internet to America.” Founded in 1985, by the height of its popularity in 2000 AOL was the United States’ largest internet provider.3 Meanwhile, the media conglomerate, Time Warner, Inc. was being decried as an “old media” company, despite its tangible businesses like publishing, and television, and an enviable income statement.
In 2000, in a masterful display of overweening confidence, the young upstart AOL purchased the venerable giant Time Warner for $165 billion; this dwarfed all records and became the biggest merger in history. 4 The vision was that the new entity, AOL Time Warner, would become a dominant force in the news, publishing, music, entertainment, cable, and Internet industries. After the merger, AOL became the largest technology company in America.
However, the joint phase lasted less than a decade. As AOL lost value and the dot-com bubble burst, the expected successes of the merger failed to materialize, and AOL and Time Warner dissolved their union:
In October 2016, AT&T (NYSE: T) and Time Warner (TWX) announced a deal in which AT&T will buy Time Warner for $85.4 billion, morphing AT&T into a media heavy hitter. In June 2018, after a protracted court battle, AT&T completed its acquisition of Time Warner.4
Certainly, the AT&T-Time Warner acquisition deal of 2018 will be as historically significant as the AOL-Time Warner deal of 2000; we just can’t know exactly how yet.4 These days, 18 years equals numerous lifetimes—especially in media, communications, and technology—and much will continue to change. For the moment, however, two things seem certain:
Mergers and Acquisitions (M&A)
Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions.
A hostile takeover is the acquisition of one company by another without approval from the target company’s management.
A friendly takeover occurs when a target company’s management and board of directors agree to a merger or acquisition proposal by another company.
A predator is a powerful, financially strong company that grabs up another weaker company in a merger or acquisition.
“Just Say No” Defense Definition
A “just say no” defense is a strategy used by boards of directors to discourage hostile takeovers by rejecting the takeover bid outright.
The Pac-Man defense is a defensive tactic used by a targeted firm in a hostile takeover situation.
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