Acquisition and Takeover

ACQUISITION

Acquisition occurs when one entity takes ownership of another entity's stock, equity interests
or assets. It is the purchase by one company of controlling interest in the share capital of
another existing company. Even after the takeover, although there is a change in the
management of both the firms, companies retain their separate legal identity. The companies
remain independent and separate; there is only a change in control of the companies. When
an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Acquisition refers to the process of acquiring a company at a price called the acquisition price
or acquisition premium. The price is paid in terms of cash or acquiring company's shares or
both.

It is an attempt to gain majority interest in another firm. The firm attempting to gain a
majority interest is called the acquiring firm and the other firm is called the target firm.

Once the acquisition is completed the acquiring firm becomes the legal owner and controller
of the business of the target firm.

There are two types of business acquisitions, friendly acquisition and hostile acquisition. In a
friendly acquisition, a company invites other companies to acquire its business. In a hostile
acquisition, the company does not want to sell its business. However, the other company
determined to acquire the business takes the aggressive route of buying the equity shares of
the target company from its existing shareholders.

• Acquisitions may lead to:

 Subsequent merger

 Establishment of a parent-subsidiary relationship

 As the motive is to takeover someone else's business, the acquiring company offers to
buy the shares at a very high premium, that is, the gaining difference between the
offer price and the market price of the share. This entices the shareholders and they
sell their stake to earn quick money. This way the acquiring company gets the
majority stake and takes over the ownership control of the target company.
 Acquiring an existing business enables a company to speed up its expansion process
because they do not have to start from the very scratch. The target company is already
established and has all the processes in place. The acquiring company simply has to
focus on merging the business with its own and move ahead with its growth
strategies. However, in reality, it is not as simple as it seems. Most of the acquisitions
fail miserably due to poor implementation attitude and strategies.

 Acquisition is an attempt made by one firm to gain majority interest in another firm.
 The firm attempting to gain a majority interest is called the acquiring firm and the
other firm is called the target firm.
 Through acquisitions companies seek to achieve economies of scale, increased
efficiency and enhanced market visibility.

Some prominent acquisitions include the following:

1. Google’s largest acquisition when it acquired Double Clik, an advertising company.

2. Mahindra & Mahindra’s acquisition of 90% stake in German company Schoneweiss.

Horizontal Acquisition

 A horizontal acquisition is when one company acquired another company that is in

the same business. For example, ABC Inc., a widget manufacturer, acquirers XYZ
corp., another widget manufacturer.

• Some horizontal acquisitions involve competitors. For example, in the case of ABC
Inc. and XYZ Corp., they both sold to the same customer base.

• However, a horizontal acquisition does not have to involve competitors. This would
be the case if ABC Inc. sold widgets exclusively on the East Coast, while XYZ Corp.
sold only on the West Coast.

• The advantages of a horizontal acquisition include the potential to increase a

company’s customer base and market share, and help a company expand its reach into
new markets.
 • Instead, it refers to companies acquiring other firms in their industry—companies that
offer similar or the same products. When Facebook acquired Instagram, it was a
horizontal acquisition. Both companies were social networks for people to connect,
share, and promote themselves. 

Vertical Acquisition

 A vertical acquisition is when one company acquires another company that is in a

different position on the supply chain.

• The acquirer may be higher up on the chain. For example, ABC Inc. (our widget
manufacturer) acquires a company that makes a key component part used by ABC
Inc. to make its widgets. Or the acquirer may be lower on the chain. For example,
ABC Inc. buys the company that has retail stores that sell its widgets.

• Vertical acquisitions can bring in new income streams as well as lower costs of
production and streamline operations.

• In this case, a company buys another that falls in a different place on the supply
chain. 

Conglomerate Acquisition

 A conglomerate acquisition is when the acquirer and target are in unrelated industries
or engaged in unrelated activities. For example, a company involved in the real estate
business acquires an insurance company.

• Diversification is a main reason for a conglomerate acquisition. If one product or

service is struggling, hopefully there are others that are doing well — helping to
provide stability for a company.

• A conglomerate acquisition occurs when one company buys another from a

completely unrelated industry. 

•  Procter & Gamble is the company behind the Oral-B line of dental hygiene products
while also selling Tide laundry detergent. 

Congeneric Acquisition
 • A congeneric acquisition is when the acquiring company and the acquired company
have different products or services but sell to the same customers. For example, DEF
LLC provides a trademark searching and filing service for law firms and acquires
LMN LLC, which provides a UCC searching and filing service for law firms. This
kind of acquisition helps a company increase market share and expand its product
lines.

Strategies for Acquisition

To make acquisition more effective and meaningful, companies need to adhere to the
following:

1. Increase the number of targets

2. Always explore alternatives available and not chase the one everyone else is bidding
for,

3. Compare the targets concurrently in an attempt to choose the right and the best target.

4. Buy the firm with assets that meet the current needs to build competitiveness.

5. Provide adequate financial resources so that profitable projects would not be lost.

6. Identifying targets that are more likely to lead to easy integration and building
synergies.

7. Continue to invest in research and development as a part of the firms overall strategy.

Forms of Acquisitions

• Acquistion either can be done by either buying the stock or by buying the assets

• 1. Asset Purchase – Acquirer purchases the targets assets only and not the liability. It
avoids accepting targets liability. AS the target is paid directly no SH approval is
required.

• 2. Stock Purchase – The acquirer pays the target firm’s shareholders cash or shares in
exchange for the shares of the target company. Here the target SH’s receive
compensation and not the target company. Hence the target SH’s should approve the
 transaction by majority votes which can be a lengthy process. The SH has to bear the
tax liability as they receive the compensation directly.The Acquirer absorbs all the
assets and liabilities of the target even those which are not in the balance sheet.

Asset Purchase

• The acquiring firm purchases specific identifiable assets for business. These assets are
perceived as having potential to add value to the acquiring company.

• The target company does not prefer this method as it has to pay capital gains tax on
the difference between the assets sold and purchase price allocated to such assets.

• If the target company desires to use the proceeds of the asset sale for paying dividend
to the stockholders, dividend would be subject to an additional tax, thus increasing the
burden on the target company.

Stock Purchase

• The acquirer purchases the entire outstanding equity of the target company.

• It is a method whereby the acquirer purchases the entire company and all assets and
liabilities of the business that come with it.

• Stock purchase does not cause any disruption in the operations which can continue as
usual.

• If the shares are widely held, a transmittal letter needs to be distributed to

shareholders to facilitate the exchange of their shares for the consideration by delivery
of their stock certificates.

• This method is preferred by the target company as the target only incurs capital gain
on the difference between basis in stock sold, which is not subject to depreciation and
purchase price for stock. No dividend has to be paid to distribute the proceeds of sale
to stockholders and double taxation can be avoided.

• The acquiring company does not prefer the method for it cannot pick and choose
assets and liabilities. It has to inherit everything, including unknown liabilities such as
seller’s contracts and employees.

ACQUISITION
Acquisition occurs when one entity takes ownership of another entity's stock, equity interests
or assets. It is the purchase by one company of controlling interest in the share capital of
another existing company. Even after the takeover, although there is a change in the
management of both the firms, companies retain their separate legal identity. The companies
remain independent and separate; there is only a change in control of the companies. When
an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Recent examples: • Snapdeal and Freecharge ($400 million) • Flipkart and Myntra ($300 to
330 million) • Ola and TaxiForSure ($200 million)

Takeovers and acquisitions are common occurrences in the business world. In some cases,
the terms takeover and acquisition are used interchangeably, but each has a slightly different
connotation. A takeover is a special form of acquisition that occurs when a company takes
control of another company without the acquired firm’s agreement. Takeovers that occur
without permission are commonly called hostile takeovers. Acquisitions, also referred to as
friendly takeovers, occur when the acquiring company has the permission of the target
company’s Board of directors to purchase and takeover the company. Acquisition refers to
the process of acquiring a company at a price called the acquisition price or acquisition
premium. The price is paid in terms of cash or acquiring company's shares or both. As the
motive is to takeover of other business, the acquiring company offers to buy the shares at a
very high premium, that is, the gaining difference between the offer price and the market
price of the share. This entices the shareholders and they sell their stake to earn quick money.
This way the acquiring company gets the majority stake and takes over the ownership control
of the target company. An acquisition involves purchase of one entity by another (usually, a
smaller firm by a larger one). A new company does not emerge from an acquisition; rather,
the acquired company, or target firm, is often consumed and ceases to exist, and its assets
become part of the acquiring company. Acquiring an existing business enables a company to
speed up its expansion process because they do not have to start from the very scratch. The
target company is already established and has all the processes in place. The acquiring
company simply has to focus on merging the business with its own and move ahead with its
growth strategies.

The objects of a takeover may inter alia include:

(i) To effect savings in overheads and other working expenses on the strength of
combined resources;
 (ii) To achieve product development through acquiring firms with compatible
products and technological/manufacturing competence, which can be sold to the
acquirer’s existing marketing areas, dealers and end users;
(iii) To diversify through acquiring companies with new product lines as well as new
market areas, as one of the entry strategies to reduce some of the risks inherent in
stepping out of the acquirer’s historical core competence;
(iv) To improve productivity and profitability by joint efforts of technical and other
personnel of both companies as a consequence of unified control;
(v) To create shareholder value and wealth by optimum utilisation of the resources of
both companies;
(vi) To achieve economies of scale by mass production at economical costs;
(vii) To secure substantial facilities as available to a large company compared to
smaller companies for raising additional capital, increasing market potential,
expanding consumer base, buying raw materials at economical rates and for
having own combined and improved research and development activities for
continuous improvement of the products, so as to ensure a permanent market
share in the industry;
(viii) To achieve market development by acquiring one or more companies in new
geographical territories or segments, in which the activities of acquirer are absent
or do not have a strong presence.

Legal aspects of Takeover

The legislations/regulations that mainly govern takeover are as under:

1. Companies Act, 2013

2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (The

Regulations)

3. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

As far as Companies Act, 2013 is concerned, the provisions of Section 186 apply to the
acquisition of shares through a company. Section 235 and 236 of the Companies Act, 2013
lays down legal requirements for purpose of takeover of an unlisted company through
transfer of undertaking to another company.
SEBI (SAST) Regulations, 2011 lays down the procedure to be followed by an acquirer for
acquiring majority shares or controlling interest in another company

As per Regulation 31A (8) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, if any public shareholder seeks to re-classify itself as a promoter, such a
public shareholder shall be required to make an open offer in accordance with the provisions
of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Exception
from the applicability The regulations shall not apply to direct and indirect acquisition of
shares or voting rights in, or control over a company listed without making a public issue, on
the institutional trading platform of a recognised stock exchange