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