Today, we examine the “other half” of “M&A”, acquisitions. Often used indistinguishably with our previous words, takeover and merger, acquisition is slightly different and more broad in scope. In the same way that all thumbs are fingers but not all fingers are thumbs, all takeovers and mergers are acquisitions but not all acquisitions are takeovers or mergers. If this sounds confusing, that is because it is, likely because most people use these words interchangeably, but, hopefully, with a little explanation, we can clear up some of the confusion and give a better understanding of the term.
At its base level, an acquisition is when an individual acquires something. Coming to English in the late 14th century from the Old French acquisicion (purchase, acquirement), the word has its roots in the Latin acquisitionem, meaning ‘to get in addition or accumulate’. For corporations, an acquisition is when a company acquires a controlling interest in another target company, with that meaning first recorded in the mergers and acquisitions phrase in The Journal of political economy from 1941: “In the second period there was a similar wave of mergers and acquisitions, causing the disappearance of many concerns in manufacturing.”
Though mergers and takeovers are both technically acquisitions, what separates them is their identity: while mergers involve 2 companies joining together to create a new identity and takeovers involve a company becoming a part of another company’s identity, an acquisition doesn’t require that the companies join together at all.
Given, the reason for any sort of M&A are virtually the same (cost reductions, increased market share, market penetration, etc.); however, obtaining a controlling interest in another company without fully taking it over does offer a number of advantages, such as already having an established brand, management structure, and potentially lowering the cost and liability when compared to a takeover.
Naturally, most acquisitions are more modest than the multi-billion dollar blockbusters that you read about in the financial section of your news site, but, regardless of size and much like any other investment, there is always a certain element of risk involved. Whether it be from lack of due diligence, failed integration, costs, or productivity issues, the graveyard of business is littered with failed acquisitions.
One notable example is 2005’s $35 billion telecom acquisition of Nextel by Sprint, which, due to cultural differences and integration issues, in the span of only 3 years, was forced to write-off $30 billion in one-time charges (and their bonds were downgraded to “junk” status). Another painful example comes from way back in 1994, when Quaker Oats acquired Snapple Beverage Company for $1.7 billion: misunderstanding Snapple’s appeal with consumers, its market competition (Pepsi and Coca-Cola products), and its marketing, Quaker was forced to sell the company just 27 months later for only $300 million (a loss of $1.4 billion).
