Acquisition refers to the process where one company gains ownership or control of another company by purchasing its shares, assets or a controlling stake. It is a core concept in corporate finance. Corporate finance uses this strategy to grow faster, enter new markets, or eliminate competition. The strategy sits under the broader umbrella of Mergers and Acquisitions (M&A).
Main Categories of Acquisition
- Friendly Acquisition: The target company’s board approves the deal and cooperates through negotiations.
- Hostile Acquisition: The acquirer pursues the takeover without the target board’s consent, often directly approaching shareholders.
- Reverse Acquisition: A smaller company gains management control of a larger, established company and retains the larger company’s name.
- Asset Acquisition: The buyer purchases specific assets and liabilities of the target, not the entire company.
- Stock Acquisition: The buyer purchases shares directly, gaining full ownership including all liabilities.
How Acquisition Works: Step-by-Step
- Identify the target company through market research or supply chain analysis.
- Conduct due diligence (DD) to assess the target’s financials, assets, and liabilities.
- The parties may sign a Letter of Intent (LOI) to outline confidentiality and exclusivity terms.
- Agree on a valuation using methods like Discounted Cash Flow (DCF) or relative valuation.
- Structure the deal as an asset purchase, equity purchase, or merger.
- Finalise a definitive agreement such as a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA).
- Receive regulatory approvals from bodies like the Competition Commission of India (CCI).
- Close the deal and begin integration.
Acquisition Formula and Valuation
There is no single formula for acquisition, but Enterprise Value (EV) is the most widely used measure.
Enterprise Value (EV) = Market Capitalisation + Total Debt + Preferred Equity + Minority Interest – Total Cash and Cash Equivalents
| Symbol | Meaning |
|---|---|
| Market Capitalisation | Current share price × total shares outstanding |
| Total Debt | All short-term and long-term borrowings |
| Total Cash | Cash and liquid equivalents held by the company |
Example: Company A wants to acquire Company B. Company B has a market cap of ₹500 crore, total debt of ₹100 crore, and cash of ₹50 crore. The EV is ₹500 + ₹100 + ₹0 + ₹0 – ₹50 = ₹550 crore. This EV of ₹550 crore represents the true cost of acquiring Company B.
Types and Classifications of Acquisition
Acquisitions have 3 primary classifications based on the relationship between the buyer and the target. There are also further types based on the method of payment.
By Business Relationship
| Type | Definition | Indian Example |
|---|---|---|
| Horizontal Acquisition | Buyer and target operate in the same industry | Zomato acquiring Uber Eats India |
| Vertical Acquisition | Buyer acquires a supplier or distributor | Reliance acquiring Den Networks (distribution) |
| Conglomerate Acquisition | Buyer and target operate in unrelated industries | Tata Group acquiring various unrelated businesses |
By Nature of Deal
| Type | Definition | Example |
|---|---|---|
| Friendly | Target board agrees to the deal | Tata Motors acquiring Jaguar Land Rover |
| Hostile | Acquirer bypasses board and targets shareholders | Rare in India; more common in the US and UK |
| Reverse | Smaller firm takes control of larger firm | ICICI Limited–ICICI Bank merger (2002) |
| Acqui-hire | Buyer acquires company mainly for its talent | Large Indian IT firms acquiring small tech startups |
By Payment Method
| Payment Method | Meaning | Impact |
|---|---|---|
| Cash Payment | Buyer pays target shareholders in cash | Liquidity decreases in the acquiring company |
| Stock-for-Stock | Buyer issues new shares to target shareholders | Ownership dilutes for existing shareholders |
| Debt Financing | Buyer takes a loan to fund the acquisition | Interest obligations increase post-acquisition |
| Mixed | Combination of cash, stock, and debt | Balances liquidity and dilution risk |
How Acquisitions Work in Practice
An acquisition starts with the acquirer identifying a target company. The target company is selected based on strategic fit, market share, technology, or talent.
Think of it like buying a shop in your neighbourhood. You do not just look at the rent. You check the shop’s customer base, its existing inventory, its debts, and whether the location suits your business plan. An acquisition follows this exact logic, just at a much larger scale.
Due diligence is the most critical step in the acquisition process. Due diligence involves lawyers, accountants, tax advisors, and business teams from both sides. The process validates financial assumptions and reduces risk before money changes hands.
After due diligence, both parties draft a definitive agreement. The agreement covers 5 key areas: conditions for closing, representations and warranties, covenants governing conduct, termination rights, and indemnification provisions.
Not every acquisition in India automatically requires approval from the same regulator. Regulatory requirements depend on factors such as the size of the transaction, industry, ownership structure, listed or unlisted status of the companies, and nature of the acquisition.
Certain transactions may require approval or notification to authorities such as the Competition Commission of India (CCI), while acquisitions involving listed companies may also need to comply with applicable SEBI regulations.
Benefits and Strategic Reasons for Acquisitions
Companies choose acquisitions for 6 main strategic reasons.
- Market share growth: The acquiring company absorbs a competitor, increasing its pricing power and customer base.
- Access to new technology: Technology-driven acquisitions help companies gain intellectual property without building it from scratch. Example: Large Indian IT firms acquiring cloud-focused startups.
- Geographical expansion: Companies enter new states or countries faster through acquisitions than organic growth.
- Talent acquisition (acqui-hire): Some companies buy startups primarily to bring skilled teams in-house. Acqui-hire deals are common in India’s growing fintech and SaaS startup ecosystem.
- Cost reduction through synergy:Combining two businesses may reduce overlapping expenses, streamline operations, improve purchasing power, or create operational efficiencies. However, the actual benefits depend on how successfully the businesses are integrated.
- Diversification: Companies may acquire businesses in different industries or market segments to diversify their revenue sources and reduce dependence on a single business area.
Acquisitions in the Indian Context
Acquisitions in India may be governed by several regulatory frameworks depending on the nature of the transaction. Some important frameworks can include:
- Companies Act, 2013: Governs the legal structure of corporate mergers and acquisitions.
- SEBI Takeover Code (SEBI (SAST) Regulations, 2011): Regulates open offers when an acquirer exceeds a 25% shareholding threshold in a listed company.
- Competition Act, 2002: Empowers the CCI to review and approve or block combinations above defined thresholds.
Notable Indian Acquisition Examples
| Acquirer | Target | Sector | Reason |
|---|---|---|---|
| Flipkart | Myntra | E-commerce | Market share expansion |
| Tata Motors | Jaguar Land Rover | Automotive | Brand and global market access |
| Reliance Industries | Hamleys | Retail | Brand acquisition and retail expansion |
| Zomato | Blinkit | Quick commerce | Category and geographic expansion |
Acquisitions and Personal Finance: What It Means for Citizens
Although acquisitions are corporate transactions, they can indirectly affect consumers. Depending on the nature of the deal, customers may see changes in product offerings, pricing, service quality, customer support, or loyalty programmes. Such changes can also influence household finances and the ability to manage existing commitments such as personal loans.
When banks or Non-Banking Financial Companies (NBFCs) are acquired or merged, their products, processes, interest rates, eligibility criteria, or customer servicing may change. Your credit score continues to be an important factor lenders consider when assessing loan applications and determining applicable terms.
Consumers and business owners affected by changes in income or financial circumstances may also benefit from understanding how personal loans work before making new borrowing decisions. Investors, meanwhile, may monitor acquisition announcements because such transactions can influence company valuations, future earnings expectations, and share prices.
Acquisition vs. Merger: Key Differences
Many people use “acquisition” and “merger” interchangeably. These 2 terms have distinct legal and structural meanings.
| Factor | Acquisition | Merger |
|---|---|---|
| Definition | One company takes ownership of another | Two companies combine to form a single entity |
| Survival of companies | Target may or may not survive as a separate entity | At least one entity dissolves |
| Size dynamics | Buyer is usually larger than the target | Companies are often of comparable size |
| Legal outcome | Target becomes a subsidiary or dissolves | A new or consolidated legal entity is formed |
| Example | Flipkart acquiring Myntra | Vodafone India and Idea Cellular forming Vi |
| Power dynamic | Acquirer holds control | Shared or equal control in a merger of equals |
FAQs on Acquisition
1. What is an acquisition in simple words?
An acquisition is when one company buys another company. The buyer takes ownership of the target by purchasing its shares, assets, or both. Example: Flipkart acquiring Myntra is a well-known Indian acquisition.
2. What is the difference between an acquisition and a merger?
In a merger, two businesses combine under an agreed corporate structure. Depending on the transaction, one entity may survive or the businesses may operate through a newly formed or consolidated entity.
3. What are the main types of acquisitions?
There are 3 main types based on industry relationships: horizontal (same industry), vertical (supply chain), and conglomerate (unrelated industries). Based on approach, acquisitions are friendly or hostile.
4. How is an acquisition financed?
Acquisitions are financed in 3 primary ways: cash payment, stock-for-stock swap, or debt financing (loans). Many large deals use a mix of all 3.
5. Do acquisitions require government approval in India?
No. Regulatory requirements depend on the size, industry, ownership structure, and nature of the transaction. Certain acquisitions may require approval or notification to authorities such as the Competition Commission of India, while transactions involving listed companies may also need to comply with applicable SEBI regulations.
6. What is a hostile takeover in an acquisition?
A hostile takeover happens when the acquirer pursues the target company without the consent of its board of directors, typically by directly approaching shareholders with a tender offer.
7. What is the role of due diligence in an acquisition?
Due diligence is a detailed verification process. It validates financial data, legal status, liabilities, and operational health of the target company before the deal is finalised.
8. How does an acquisition affect employees?
An acquisition may create new career opportunities, combine teams, change reporting structures, or result in restructuring where functions overlap. Employee outcomes depend on the strategic objectives of the transaction and the company’s integration plan.
9. Can a smaller company acquire a larger company?
Yes. This is called a reverse acquisition or reverse takeover. The smaller company gains management control but often retains the larger company’s brand and identity.
10. How does an acquisition affect the Indian stock market?
The target company’s share price may rise if investors expect shareholders to receive a premium over the prevailing market price. Acquirer shares may rise or fall depending on market perception of the deal’s value.