What Is an Acquisition?
An acquisition is a transaction in which one company, the acquirer, buys another company, the target, and takes control of its operations. The target may be absorbed entirely, kept as a subsidiary, or integrated over time, but its shareholders are bought out and control passes to the buyer.
Acquisitions of public companies almost always involve a control premium, commonly 20% to 40% above the target's recent trading price. If a target trades at $50 per share, a buyer might offer $65, a 30% premium, to convince shareholders and the board to sell.
How Acquisitions Are Structured
Buyers can pay with cash, their own stock, or a mix, and each choice has different implications for risk, ownership, and earnings impact. Cash deals give target shareholders certainty of value, while stock deals let them participate in the combined company's upside but expose them to the buyer's share price.
Deals are also structured as either stock purchases, where the buyer acquires the target's shares and everything that comes with them, or asset purchases, where the buyer selects specific assets and liabilities. Asset deals are more common for smaller or distressed targets because they let buyers leave unwanted liabilities behind.
Why Companies Make Acquisitions
Common motives include gaining market share, entering new geographies, acquiring products or technology, and capturing cost synergies by eliminating duplicate functions. Large tech companies, for example, have repeatedly paid multibillion-dollar prices for targets whose products would have taken years to build internally.
The risk is overpaying, since any premium must be justified by synergies or growth that may never materialize. Overpriced acquisitions frequently lead to goodwill impairments years later, an admission that the buyer paid more than the business proved to be worth.
Acquisitions on the Job and in Interviews
Bankers on the sell-side run auctions to maximize the price for the target, while buy-side advisors help acquirers value targets, structure offers, and arrange financing. Analysts spend much of their time on valuation work, including comparable companies, precedent transactions, and DCF analyses that frame what a buyer should pay.
In interviews, a classic question is how paying with cash versus stock affects an acquisition's accretion or dilution, so understanding deal financing is essential.
