An acquisition deal involves one company buying and taking control of another business entity, absorbing its assets and sometimes liabilities. It’s a more involved deal than a merger, and requires the involvement of both companies’ boards and regulatory bodies. Often, it’s based on the idea of creating synergies between two entities by combining resources and capabilities. It’s a common way for companies to expand their market share without increasing production costs.
The first step in any M&A transaction is gathering information on the potential target. Most likely, the interested parties would sign Non-Disclosure Agreements and enter into a Letter of Intent to outline the terms of the proposed deal.
Once the due diligence process is complete, companies usually negotiate the terms of the deal, focusing on how they’ll fund it with debt or equity, and considering any legal or financial implications. They may also rely on tools like discounted cash flow (DCF) analysis to determine the current value of the target, which combines forecasted free cash flows with the cost of capital.
A key consideration in an acquisition deal is ensuring that the target’s culture fits well with the acquiring company. Otherwise, the new employees may not work together as smoothly as expected, which can create friction and antagonism. It’s also important to ensure that the target has no significant liabilities or excess litigation. If it does, the acquiring company might have to settle or fight lawsuits after the purchase is finalized.