An acquisition is an investment in a new business that includes obtaining ownership of all its tangible and intangible assets. This includes human capital, contracts, physical assets, workflows, and intellectual property. Companies acquire to enter new markets, gain market share, reduce competition, and increase revenue. The “pro” side of M&A is that it can be a quick and effective way to expand and generate growth.
The “con” side of M&A is that it requires an in-depth analysis, negotiation, and integration. It also requires a company to be flexible in its approach to M&A. It can’t rely solely on acquisitions for growth – it needs to invest in other ways, including new technologies and research/development. Additionally, a company that makes too many acquisitions can suffer from the same logistical challenges as any other growing company.
A key part of developing the acquisition strategy is conducting market research to determine the availability and pricing of potential suppliers. This may include determining whether to use existing contracts, conduct a competitive procurement, or pursue other acquisition methods. The acquisition strategy should also specify evaluation criteria and contract terms and conditions.
Acquisitions can be in the form of a stock purchase, where the acquiring company purchases the company’s shares directly from shareholders, or an asset purchase, where only the desired assets are purchased and liabilities are excluded (or expressly stipulated). The acquiring company will need to determine its objective valuation through several metrics. A common approach is to compare the startup’s performance with its peers and the overall market, or to employ a formula like discounted cash flow, which determines a business’s value by estimating future cash flows.
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