Stock acquisitions are one of the many methods business owners use to take over another company. When entities do this ...
Stock acquisitions are one of the many methods business owners use to take over another company. When entities do this without permission from other stockholders, it becomes known as a hostile takeover. Corporations often turn to hostile takeovers when the companies they wish to acquire have rejected their bids. In relation to mergers and acquisitions, what is stock acquisition and how does it work?
In its most basic form, a stock acquisition is when a company or an individual purchases the majority of another company's shares. Doing this gives them control over that company. It generally involves acquiring more than 50% of the company's stock, effectively making the acquirer the new owner.
The most important thing to focus on in the stock acquisition definition is the transfer of ownership rights. The acquirer gains the ability to make decisions at an organizational level. This person or business can influence the company's business strategies, governance, and operational practices.
It's important to remember that successful stock acquisitions require extensive due diligence on both sides. The acquirer must demonstrate the value of their offer, and the target company must showcase how much it’s worth. Both parties must feel confident in the other’s ability to perform.
The process of a stock acquisition begins with identifying a suitable target. This includes analyzing the target company's business performance, financial health, IT infrastructure, and strategic value. Once the due diligence process confirms the attractiveness of the proposed deal, the acquiring company makes a bid or negotiates the terms and purchase price of the shares.
The acquiring entity then purchases shares directly from the company in a private transaction or from the stock market. These purchases must follow the rules and regulations set by the Securities and Exchange Commission.
This process does not necessarily mean the target company ceases to exist. Instead, it now operates under the control of the company that bought it. The acquiring party can steer the target company according to its strategic objectives and operational practices.
Gaining control over a company has immediate benefits for the controller. However, these strategic objectives might not align with the target company's goals. For example, the target company might want to focus on creating high-quality products for a niche market, but the larger company wants to mass-produce those items for larger profits. This could ultimately impact the quality and cause a disconnect from the original target market.
Stock acquisitions can enhance business growth and profitability. When you know what benefits to expect, you can implement processes that ensure you capitalize on the full value.
Acquisitions eliminate complex negotiations because they don't require approvals from existing or potential shareholders. However, failure to disclose the takeover could result in a lawsuit. In one well-known stock acquisition example, Twitter shareholders sued Elon Musk in 2022 after his late disclosure of purchasing a majority stake.
The law required Elon Musk to notify the Securities and Exchange Commission of buying 5% or more of Twitter's stock within 10 days. However, Musk reportedly took an extra day to make the filing. In the lawsuit, shareholders alleged that this helped him save $143 million.
Compared with other methods, such as cash mergers, stock acquisitions are generally more cost-effective and less time-consuming. This can also benefit both parties. In most cases, they can save money because of the streamlined process.
Here are some of the many steps you skip with a stock acquisition:
Stock acquisitions provide a faster, easier way to access the target company's customer base. They also provide immediate access to the following:
This allows the acquirer to expand their market share and penetrate new markets. These resources can give the acquiring company a competitive advantage over its rivals.
In the dynamic business landscape, stock acquisitions represent a strategic move for organizations aiming to expand their influence and control. They provide the following:
However, there are potential risks to acknowledge and mitigate.
Acquired companies and their employees often worry about loss of control. They know that when they become subject to another company’s will and business goals, the things that matter most to the company might come second. In some cases, new management might not consider such values at all.
This can be incredibly challenging for companies whose founder or CEO is heavily involved in business operations. Add employee loyalty to the mix, and the acquiring company risks heavy turnover and the launch of a rival company.
The acquiring party may face increased liability after a stock acquisition. This could include responsibility for any legal issues or debts incurred before the purchase. Elon Musk’s lawsuit and investigation by the SEC presents an excellent example of this.
Stock acquisition may involve financial uncertainty due to the need for more detailed information about the company's performance or profitability. When one company decides to purchase the stock of another, the acquiring company does not necessarily need to provide anything in addition to publicly available records. This can lead to additional costs and risk for the acquirer due to it being far more difficult to assess the target company properly than with other M&A strategies.
At first glance, a stock acquisition might not seem to have much direct impact on a company's IT infrastructure. Some companies take ownership but opt not to interfere in business operations. However, many companies take a more hands-on approach to management after an acquisition. In the real-world Twitter stock acquisition example, Musk changed how the platform functions, disbanded tech teams, and ultimately rebranded the company as X. Changes like these can have significant impacts on the IT infrastructure.
What is stock acquisition when it comes to challenges companies should watch out for? Incompatible systems can be a significant obstacle without a plan. Contact Cloudficient to learn how we can resolve these and other IT concerns affecting your business.
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