An acquisition occurs when a business gains control over another entity. An acquisition is typically achieved by acquiring a majority of the voting stock held by investors, sometimes over the objections of the managers of the acquiree. It may be necessary to pay a premium over the market price in order to convince investors to sell their shares. The payment for an acquisition can be in cash, debt, or the stock of the acquirer.

The acquirer accounts for an acquisition by allocating the purchase price to the fair value of the acquiree's assets and liabilities. Any excess amount of the purchase price is classified as goodwill, which is considered a long-term asset. Goodwill is regularly examined to see if the asset has been impaired. Once an acquisition has been completed, the acquirer consolidates the financial statements of the acquiree with its own financial statements.

There are a number of reasons why a business might want to engage in acquisition activities, including the following:

  • To achieve greater economies of scale

  • To acquire a valuable brand

  • To acquire intellectual property

  • To acquire key customers

  • To become more geographically diverse

  • To cut costs by combining operations

  • To enter a market niche more quickly

  • To fill holes in the corporate product line

  • To keep the acquiree away from other potential acquirers

  • To reduce the amount of available production capacity in the industry

Related Courses

Business Combinations and Consolidations 
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Mergers & Acquisitions