What is an Acquisition?

by Investing School on June 28, 2010

Acquisition comes from the word “acquire” which means to get as one’s own or to come into possession of something. Acquisitions happen in business all the time. It is often referred to as a “takeover”. It is the process that a company will go through to purchase another company – the target company.

There are several types of takeovers or acquisitions that can occur. In a friendly acquisition, a bidder would contact the Board of Directors of that company to inform them that they are making a bid on the company. If the board thinks that the offer is in the best interest of the shareholders then the Board will recommend that the offer be accepted. In a private company, the shareholders and the board are usually made up of the same people so private acquisitions are usually friendly.

In a hostile takeover or acquisition, a bidder will bypass the target company’s board who is already rejected their bid. Once this has happened, the acquisition is now considered “hostile”. It can also be considered “hostile” if the bidding company does not inform the target company’s board before the offer is made.
A hostile takeover involves more risk. If the board does not cooperate with the bidder then the only information that is available to the bidding company is what is available to the public. Because of this risk, banks are not as willing to back hostile bids in order to finance a takeover. There are some investors, however, who will want to proceed if they have reliable knowledge of the Board’s mismanagement and want to hold them to public and legal scrutiny.

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