An acquisition deal involves one company purchasing and taking control of another, absorbing its assets (and sometimes liabilities). Ownership is typically shared, with the acquiring entity often getting a majority share of new stock issued for the combined entity. This carries with it some cost and legal complexity, and may require regulatory review in competitive industries.
Acquisitions can open up a number of revenue streams for the acquiring firm. They could add new markets, products, or services, expand geographic reach, gain access to existing customer relationships, or create additional intellectual property. They can also provide new sales channels to existing customers and facilitate valuable cross-promotions or package deals.
However, there are many things that can go wrong with a deal before it closes. The main issues revolve around the strategic fit of the target firm with the acquiring company. The best companies find targets that match their core strategy in a meaningful way, rather than simply buying the company’s name and brand. Thorough due diligence ensures that the acquiring firm “looks under the hood” of the target business to make sure its price reflects its true value.
Cultural integration is also critical. If the cultures of the two companies do not align, the acquiring company may be left with a lot of unhappy employees who have to cope with massive change, whether it’s layoffs or other significant changes in working conditions and workflow. The resulting discontent can lead to the departure of key personnel, which can increase costs and slow down the timeline for value realization.
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