An acquisition deal is a transaction in which a company buys and absorbs another business or business unit. This process enables companies to grow by increasing market share, entering new markets and products, or eliminating competitors. Often, the goal of an acquisition is to gain access to technology or other key assets that cannot be easily developed in-house. For example, Apple acquired AuthenTec, the company that makes the touch-ID fingerprint sensor technology used on its iPhones.
Before an acquisition can proceed, both parties must agree on the terms of the deal. The acquiring company performs due diligence on the target company, including conducting a valuation and exploring potential synergies. Once the deal is agreed upon, the shareholders and management of the target company must consent to the sale. They will often require the acquiring company to promise that the company will remain solvent for a period after the acquisition through the use of a whitewash resolution.
The acquiring company can structure an acquisition as a stock purchase or asset purchase. In the former, the acquiring company pays for the target company with newly issued shares of its own stock. This method dilutes existing shareholders’ stakes, but it allows the acquiring company to pay less for the target company than if it paid with cash.
An asset purchase allows the acquiring company to “cherry-pick” the assets it wants from the target company and leave behind the liabilities it does not want. This approach may help limit tax liabilities. However, it is time-consuming because the acquiring company must identify and specify each individual asset to be transferred.
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