One Company Purchases Another in an Acquisition

So what the heck is an acquisition, anyway? An acquisition differs from a merger because it doesn’t combine two companies. Rather, in an acquisition, one company purchases the other as you would purchase a car.

Acquisitions are a bit more flexible than mergers in respect to the legal organization of each company, but the one true hallmark of an acquisition is that one corporation then owns another after the acquisition process is complete.

Not all acquisitions are considered bad things. When a smaller company is being acquired by a much larger company, the larger company quite frequently appreciates the value of the smaller company, which is especially true of corporations that are already known to be troubled, and their stock has already responded to the financial difficulties appropriately by dropping in value.

In this case, even rumors of an acquisition can raise the price of the company’s stock as investors believe that being acquired by a company with more assets or better management may give the struggling company the jump start it needs to be more successful.

Take a look at two of the options that might influence the acquisition.

Organizational sovereignty is kind of an odd term — whether or not the acquired corporation remains a company in its own right or not. Remember that companies can own other companies and that the acquiring company has the option to merely make the acquired company a single branch or division of their other operations rather than allowing it to stay an independent entity.

So, in many cases, a corporation may just purchase a controlling share of the acquired company’s stock, giving it the ability to manage it from a distance but never fully integrating the two organizations. On the other hand, the acquired company may simply cease to exist, instead becoming a single division of the acquiring company.

Another variable is whether the acquisition is a full acquisition or only a partial one. In a partial acquisition, the acquiring company is required to purchase just greater than 50 percent of the equity in the acquired company.

This amount gives the acquiring company a controlling ownership, allowing it to manage the acquired corporation however it wants. A partial acquisition does, however, limit the acquiring company’s ability to completely integrate the company’s operations because private shareholders still remain.

In other words, in partial acquisitions, the acquired corporation will remain a corporation. In a full acquisition, the acquiring company purchases the total value of the acquired company and has the option to make that company simply a part of its own operations.

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