Acquisition Strengths and Weaknesses: Definition, Purpose, and Types

Have you ever heard of the term acquisition? If so, can you explain the meaning of acquisition and its types and classifications? So, to understand it further, in this article we will discuss the meaning of acquisition, its types, and its classification.

It should be understood that taking ownership of a company in the business world can happen at any time. The reason that is often expressed when a company merges with another company or makes an acquisition is because with this, the company can achieve faster growth compared to having to build its own business unit.

Mergers or acquisitions are two crucial decisions that usually occur in the business world. In the context of a company, a merger is a process of merging two companies without removing control from one of the owners. While the acquisition is the unification of two companies by transferring ownership from one party to another.

Many people think that the company acquisition process is a disgrace to old business owners. But actually, that means it can have a more positive impact on many parties. So, to find out more, let’s look at the explanation regarding the meaning of acquisition, types, and also examples below.

Definition of Acquisition

Before discussing it in more detail, we will start from its understanding. Where the meaning of this acquisition is an activity to buy most or even all of the shares and also a set of a company. Thus, the buyer or what is usually called the acquirer will later take control of the company.

This step is often taken by startup companies or small-scale companies, so they can survive and even grow. Efforts to develop the company’s business can also be done easily through integration between teams using certain applications. However, this does not mean that large-scale companies cannot take this acquisition step.

In essence, an acquisition is an activity of transferring control and power over a company to a party that takes over most or all of its assets and shares.

Definition of Acquisition According to Experts

The following are some definitions of acquisition according to experts, including:

1. PSAK No. 2 Paragraph 08 of 1999

According to PSAK or Statement of Financial Accounting Standards, an acquisition is a business combination, in which one company, namely the acquirer, gains control over the net assets and also the operations of the company being acquired, by providing certain assets, issuing shares, and recognizing an obligation.

2. Michael A. Hitt

According to Michael, what is meant by acquisition is getting or buying another company by buying most or all of the target company’s shares.

3. PS Sudarsanan

According to Sudarsanan, an acquisition is an agreement, in which a company buys shares or assets of another company and the shareholders of that company who are targeted for acquisition will stop being owners of the company.

4. Marcell Go

According to Marcell Go, an acquisition is often referred to as an investment role model which is the control of a portion of the shares of a subsidiary company, through the purchase of shares of voting rights of a subsidiary company, in a material amount of more than 50 percent.

5. Summer N. Levine

According to Summer, the transaction occurred between the two companies. Where the buyer will control most or even all of the assets of the seller.

Based on some of the definitions above, we can conclude that an acquisition is a takeover of ownership of a company by another company which is carried out by buying part or all of the company’s shares. Where the company that was taken over still has its own law with a view to business growth and development.

Acquisition Purpose

After understanding the meaning of acquisition, we now proceed to the purpose of the acquisition. A step or effort will definitely not be taken without a clear purpose. The following are the objectives of an acquisition in a business or business, including:

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1. Strategy to Make Business Grow

Not infrequently a business that actually has good opportunities but is difficult to develop. One of them is due to limited resources. Under certain conditions, this acquisition step is often taken as a solution to expand the business. Usually, the company being acquired is still a beginner or a small-scale business but has good prospects in the future.

2. Business Expansion

Apart from developing their business, business owners will also be interested in expanding their business if there is an opportunity. Acquisition here is an easy and fast way to expand your business internationally. You only need to buy shares from companies in the country you want to target for market expansion. By buying their shares, you don’t have to bother anymore to do recruitment, branding, and also prepare ownership of other assets for business operations.

3. Suppressing Business Competition and Excess Stock

The next objective is to suppress business competition and prevent stock buildup of production results. With minimal competition, the company can focus more on the production process. Meanwhile, stock buildup of production results can also be avoided. This is because other companies have already been acquired or acquired to help with distribution.

4. Increase Efficiency

In reality, corporate acquisitions are not always about competition. This acquisition strategy could have been agreed upon by both parties in order to increase the efficiency of the business processes of each company. An example of an acquisition with the aim of efficiency is a parent company choosing to acquire its branch because the human resources at the center are sufficient to manage the branch.

5. Accelerate Technology Absorption

The final goal of the acquisition is to accelerate the uptake of technology between companies. In order to make the technology adaptation process easier to carry out, business owners generally try to cut bureaucracy by unifying the ownership of the two companies.

Types of Acquisition

Apparently, the term acquisition is still classified into several different types to make it easier to distinguish them. For the types of acquisitions based on the type of business or object taken over, among others:

1. Merger or Consolidation

The term merger is often used to indicate a merger of two or more companies and later only the name of one of the merging companies will remain. While consolidation is a merger of two or more companies and the merging companies disappear, then a new name for the combined company appears.

2. Acquisition of Shares

The second way to take over another company is to buy the company’s shares, whether purchased in cash, or by replacing them with other securities, namely stocks or bonds.

3. Asset Acquisition

A company can acquire another company by buying the company’s fixed assets. This method will prevent the company from having minority shareholders, which can occur in the event of acquiring shares. The acquisition of ownership of these assets is carried out by transferring ownership rights to the assets purchased.

4. Horizontal Acquisition

Horizontal acquisition is a takeover of ownership by a company of a target company that has the same line of business. So that it is a business competitor, whether it’s a competitor that produces the same product or the same marketing area. The purpose of this acquisition is to increase market share or kill competitors.

5. Vertical Acquisition

Acquisition made between a company and a company that is still in one production chain, namely a company engaged in production from upstream to downstream. The purpose of this acquisition is to obtain certainty about the supply and sale of goods.

6. Conglomerate Acquisition

Takeover of company ownership that is not related to other companies, either horizontally or vertically. The purpose of this acquisition is so that the company being acquired can support the acquiring company as a whole and to strengthen the portfolio condition of the company group.

Acquisition Advantage

The company’s acquisition strategy has several advantages that we cannot deny, including:

1. Bigger Business Capitalization

The first advantage of an acquisition is that the business capitalization is getting bigger. If previously the capitalization of a business was limited to the assets they owned, then the acquisition process can accumulate new assets. Thus, the amount of business assets will also be greater, even doubled.

2. Mastery of Market Share is Wider

The next advantage of this acquisition is that the mastery of the market share becomes wider. Especially if the company that was successfully acquired is a competitor. Because by carrying out this acquisition strategy, you can control your competitors’ market share at the same time.

3. The process is simpler than a merger

If the merger and acquisition strategy is compared with the process aspect, then the company acquisition strategy is the easiest to implement. When the merger, both parties must make a name, new policies, and also legality. Meanwhile, in the acquisition process, you can immediately merge the new business and equate all the legalities and policies with the previous company.

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Acquisition Weaknesses

Even though it looks profitable, acquisitions also have some unavoidable drawbacks, including:

1. High Cost in terms of Administration and Capital

Acquisition is a process that requires a lot of capital, especially in terms of costs and administrative transitions. Therefore, the company acquisition process often involves businesses with a small scale or near bankruptcy, so that the costs are not too high.

2. The Risk of Unable to Control Large Amounts of Resources

If the company is not ready to make acquisitions, there will be many shocks, especially from controlling resources. In the end, the acquisition process was inefficient and unable to produce projected profits as expected.

3. Acculturation of Corporate Culture is Hampered

The last weakness of the acquisition is that the cultural acculturation process takes longer compared to all the old business stakeholders being acquired. Many people equate corporate acquisitions with a process of cultural imposition. This will be a heavy burden for your company’s HRD.

Nature of Friendly Acquisition or Discord

Acquisitions can be disputed in nature or take place in friendly and amicable conditions. Where a friendly acquisition can occur when the target company states its agreement to be acquired. While the disputing acquisition does not have the same agreement of the target company and also the acquiring company must actively buy large shares of the target company to become dominant.

Friendly acquisitions generally work toward mutual benefit, for either the buying company or the company being bought. The company develops a strategy to ensure that the company buys assets, including a review of financial statements and other assessments. Once both parties agree to the terms and meet all legal requirements, the purchase will be made.

A hostile acquisition is generally referred to as a hostile takeover, because it occurs when the target company does not agree to the acquisition. In this case, the acquiring company must collect majority shares to force the acquisition. To obtain the required shares, the acquiring company may issue a tender offer designed to induce current shareholders to sell their holdings in exchange for a price above market value.

This acquisition notice must be filed within 30 days with the Securities and Exchange Commission (SEC) with a copy addressed to the target company’s board of directors.

Share Prices and Acquisitions

Companies that have acquired often offer a premium to the market price of the target company’s stock in order to entice shareholders to sell their shares. When a company acquires another entity, there will generally be a predictable short-term effect on the shares of both companies. In general, the acquiring company’s stock will fall, while the target company’s stock will rise.

The target company’s shares will generally increase due to the premium paid by the acquired company. The acquiring company’s stock will usually go down for a number of reasons. The first is, as explained above, that the acquiring company must pay a higher price compared to the currently targeted company. Beyond that, there is often some uncertainty involved with acquisitions. Below are some of the problems that may be faced by the acquiring company during the acquisition process, including:

a. Turbulent integration processes such as problems associated with the integration of different workplace cultures.
b. Loss of productivity due to management power struggles.
c. Obstacle debt or expenses that must be issued to make a purchase.
d. Accounting problems that weakened the financial position of the acquiring company, including restructuring costs.

Post Acquisition

Most of the attention during the acquisition process will go towards market share, valuation, as well as legality. While the success of these acquisitions is usually dependent on how the new company handles its many responsibilities, a new corporate structure, as well as logic, must still be established. Resources also need to be allocated towards their most worthy goals. Accounting processes and information must be combined in a legal way, including tax efficiency.

Pre-existing business relationships must be reviewed, including those with staff. In addition, the acquiring company must learn and become acquainted with operations, new suppliers, and also customers. The new owner has to meet the new employees, who may be concerned about their job status as well as the culture that has changed.

The new leadership is also responsible for communicating effectively, making fair and honest decisions, and working to minimize the risks and costs involved during this transition. There is also a need for new logistics for the delivery of goods and services for technology integration. Because this merger will involve several new employees, a command structure must be designed, articulated, and also implemented.

This is an explanation of the meaning of acquisition, its purpose, and also its types. For Sinaumed’s who want to know more deeply about other company policies, they can read related books by visiting sinaumedia.com. To support Sinaumed’s in adding insight, sinaumedia always provides quality and original books so that Sinaumed’s has #MoreWithReading information.