Acquisition

One company purchasing controlling interest in another.

An acquisition occurs when one company purchases a majority or controlling stake in another company, known as the target. Unlike a merger, where two entities combine to form a brand new corporation, an acquisition typically results in the target company being absorbed into the buyer's existing corporate structure, or run as a subsidiary. Acquisitions can be friendly, where the target's management approves the deal, or hostile, where the buyer goes directly to shareholders to purchase stock without management's consent. To fund an acquisition, the acquiring company can use cash, debt, its own stock, or a combination of these. Investors analyze these deals by looking at the premium paid over the target's current market value and evaluating the strategic fit. The transaction is reflected on the buyer's balance sheet, where any purchase price paid above the fair value of the target's net identifiable assets is recorded as goodwill. Retail investors pay close attention to acquisitions because they can drastically alter a company's growth trajectory and risk profile. While acquisitions can create value through synergies, cost savings, and market expansion, they also carry high integration risks. Historically, many acquisitions fail to deliver the expected value due to cultural clashes, overestimating synergies, or overpaying for the target, which can eventually lead to costly goodwill impairment charges.

Company A wants to acquire Company B, which has a market capitalization of $100 million. To convince Company B's shareholders to sell, Company A offers a 30% acquisition premium, valuing the deal at $130 million. Company A pays for this by issuing $50 million in new shares and taking on $80 million in bank debt. If Company B's net physical assets are valued at $90 million, Company A will record the remaining $40 million ($130 million purchase price minus $90 million net assets) as goodwill on its balance sheet.