An acquisition is when one company buys control of another company or business. Control usually means owning more than half of the voting shares, though it can be achieved with a smaller stake if votes are widely spread or the buyer secures special rights.
The buyer might take over the whole company, a controlling stake, or a specific division. In every case the goal is the same: gain decision-making power over strategy, assets and cash flows.
How control is obtained and what is actually bought
There are two broad ways to get control. The buyer can purchase shares in the target company, which means acquiring the equity and, with it, voting power. Or the buyer can purchase the target’s assets, such as brands, contracts and property, often leaving the legal company shell behind.
Public-company takeovers are usually run through a formal offer process set out by local rules. In some places that is a shareholder vote following a court-sanctioned scheme. In others it may be a direct tender offer to all shareholders. The mechanics vary by jurisdiction and can change, but the outcome is similar if the deal succeeds: the buyer ends up controlling the target.
Deal structures: share purchase vs asset purchase
Share purchase: The buyer acquires the target’s shares and with them the company as a whole, including subsidiaries, contracts and most liabilities. This is the norm for public targets. It is simpler for continuity because the legal entity does not change, but it also means the buyer takes on historic obligations.
Asset purchase: The buyer selects specific assets and liabilities to take over. This can be attractive if the target has legacy issues the buyer wants to avoid, or if only a division is desired. It can be more complex to transfer employees, permits and contracts, and tax treatment depends on local law. Exact outcomes differ by country and can be subject to regulatory and tax changes.
Private deals also include management buyouts and leveraged buyouts, where the acquiring group uses significant debt secured on the target’s cash flows. The label may change, but these are still acquisitions.
Cash, shares or a mix: how buyers pay
Consider three common payment methods. Each affects risk and how the market prices the deal.
- All-cash offer: The buyer pays a fixed price per share in cash. Target shareholders lock in the premium immediately if the deal completes. The buyer bears funding and refinancing risk.
- All-share offer: Target shareholders receive shares in the buyer. The value they receive moves with the buyer’s share price until completion. Ratios are set in the offer, and outcomes depend on the buyer’s performance.
- Mixed consideration: A combination of cash and shares. Some deals also include contingent value rights or earn-outs, which pay extra if certain milestones are met. These features and their tax treatment vary by jurisdiction and can change.
Large buyers often finance cash with a mix of on-balance-sheet cash and new debt. Lenders may provide bridge loans that are later refinanced with bonds or bank facilities. The more debt used, the greater the sensitivity to interest costs and future cash generation.
Premiums, valuation and why bids succeed
Acquirers typically offer a premium over the target’s pre-announcement share price. That premium compensates shareholders for giving up future upside and handing control to the buyer. If a target traded at 100p and the buyer offers 130p, that is a 30% premium.
What sets the price? Buyers weigh several factors:
- Standalone value: Discounted cash flow, comparables and precedent transactions.
- Synergies: Cost savings and revenue gains from combining operations, such as shared logistics or cross-selling.
- Competition for the asset: Multiple bidders can drive higher offers.
- Financing cost: Higher borrowing costs lower what a buyer can justify.
Boards consider not just the headline number but certainty of completion and the form of consideration. A slightly lower bid with higher certainty can win if regulatory or financing risks look lower. Break fees and reverse break fees may be negotiated to share risk if the deal fails.
Friendly vs hostile approaches
A friendly bid has the target board’s support. The companies sign a recommended offer agreement and move to shareholder votes and regulatory filings.
A hostile bid goes directly to shareholders without board endorsement. The target may adopt defensive tactics allowed in its jurisdiction, seek a higher price, or find a white knight bidder. Outcomes tend to hinge on shareholder sentiment and regulatory views. Rules on bid conduct, disclosure and defences differ by market and can change, so practice is not identical across countries.
Approvals, timelines and what traders watch
Most acquisitions need several green lights before they close. Common steps include:
- Board approval: Both sides approve terms.
- Shareholder approval: One or both sets of shareholders may vote, with specific thresholds set by local law and listing rules.
- Regulatory review: Competition authorities, securities regulators and, in sensitive sectors, national security reviewers assess the deal. Sector licences may also need consent.
Deals can take months to complete. During that period, the target’s share price often trades below the offer price. The gap, called the spread, reflects the risk the deal fails or is delayed. If a buyer offers 500p and the target trades at 470p, the 30p spread compensates arbitrage funds for bearing those risks. Wider spreads usually signal higher regulatory or financing uncertainty.
Acquirer shares can move in either direction. Cash-heavy deals may push the buyer’s shares lower if investors worry about leverage or integration. All-share deals can see the buyer’s price fall as arbitrageurs short the buyer to lock in the exchange ratio. Analysts also run accretion or dilution models to see how the deal affects earnings per share, margins and return on capital.
If conditions are not met, a deal can lapse and the target’s shares may drop back toward their pre-bid level. Break fees, material adverse change clauses and financing conditions all influence the outcome, and their exact language is highly specific to each agreement.
After the deal: integration and longer-term value
Closing is not the finish line. The buyer still has to merge systems, people and products. Synergies arrive in phases. Some savings, like removing duplicate head office costs, can be quick. Others, like consolidating technology platforms, can take years. Culture clashes, customer churn and regulatory undertakings can blunt the benefits.
On the balance sheet, acquisitions often create goodwill, which represents the premium over the fair value of net assets. If performance disappoints, that goodwill can be written down in later periods. For investors tracking a buyer post-deal, progress on synergy delivery, staff retention and debt reduction usually matters more than the original press release.