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What is Acquisition? Reason, Example and Type

what is acquisition

after reading this article you will be cleared through the term acquisition meaning. 

Why do companies make acquisitions?

For a variety of reasons, businesses buy rival firms or acquire. 

  1. To get a competitive advantage. 

Firms or businesses want to get an economic moat, every business also wants to get a larger market share. Perhaps a business ran out of funding or encountered logistical or physical challenges. When a company is burdened in this way, it is sometimes wiser to purchase another company rather than grow its own. Such a business may search for potential young businesses to buy and add to its income stream as a new source of profit. An investor should look that the acquirer is acquiring a company who is operating in the same domain. Let’s say the financial company should acquire the Bank, NBFC, or any other financial institute. 

2. To Get the International customer Base.

International business management taught us that companies expand their operations in other countries too to get the customer base of international countries. For Example, Xiaomi and Samsung are international companies one belongs to china and another one belongs to South Korea but they have one of the largest market shares in the handset industry in India.

3. Another type of acquisition.

Companies not only acquire other companies but they also acquire assets like land, machine, plant, etc. When we talk about those companies who are operating in infrastructure and real estate, these tangible assets become very important for them as these industries are capital intensive. Land Acquisition is the common term used in these industries. 

There could be others reasons too. 

Deep Down: Acquisition

Consider five companies Tata Group, Tata Motors, Jaguar Land Rover, Aman Motors, and Raman Motors. 

Let’s assume these  relationships between all these companies to understand more.

  • Tata Group holds 59% shares in Tata Motors

If a company is holding more than 51% in another company then it will be termed a parent and subsidiary company now, we want you to write which is a parent company and which is a subsidiary company in the comment section?

  • Tata Motors has purchased 52% shares in Jaguar Land Rover. 

This also means that Tata Motors has acquired the JLR and they will have full control over the operations of  JLR. 

  • Tata Motors has acquired 41% shares in Aman Motors. 

Since Tata Motors is holding between 20% to 50% (both inclusive) in Aman motors, Aman motors will be an associate company for Tata Motors.

  • Tata Motors has acquired between 0% to 19.9% of Raman Motors

Although it has no official name, it will be referred to as a tata motors investment in Raman motors.

Is it merger or acquistion?

The primary distinction between the two is that during an acquisition, the parent business completely assumes control of the target company and incorporates it into the parent entity. In a merger, the two businesses unite, yet a whole new entity is created.

Example: Tata Motors acquired Jaguar Land Rover which means tata motors will have full authority over the operations of JLR. 

Vodafone and Idea merged together in order to survive in the telecom sector, so this is a pure example of the merger. 

Final Words

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As an investor you have to look for a company that is acquiring a competitive business, Their acquirer should be working in only one domain. Diversification in the industry may lead to disaster. 

Reliance retail tried to acquire Future Retail to get a more customer base since both companies are in the same niche, We have seen the inclination of the share price of FRETAIL when the reliance group announced that they are going to transact. 

We hope We gave you some insights about the acquisition and delivered it in the best possible way. 

Let us know what you think about the acquisition. leave a comment, and We will respond to it. 

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Rupay Rajat
Rupay Rajat

Rupay Rajat is a financial and investing blog. I write about financial instruments and the stock market in the most easiest language.