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acquisitionthe acquisition by one firm of another firm. For companies listed on the STOCK MARKET this involves the acquiring firm either buying in the open market, or bidding for the voting SHARES in the target firm (See BID, TAKEOVER BID). Unlike a MERGER, which is usually arranged by mutual agreement between the two firms' management, a takeover is often resisted by the target firm's management, so that the bidder must convince shareholders that selling out to the acquirer, or taking shares in it in the case of a share exchange, is of benefit to them. Although a 51% stake in the target company would be sufficient to allow the acquiring company to exercise effective control, generally it would wish to take full control so as to be free from the interference of minority interests.
Takeovers are a form of EXTERNAL GROWTH by which firms expand in a horizontal, vertical and conglomerate direction. Conglomerate takeovers (the acquisition of a firm in an unrelated market) are undertaken primarily as a means of spreading business risks and to enable the firm to reorientate itself away from static or declining markets into areas offering good long-term growth and profit potential (see DIVERSIFICATION). Vertical takeovers (the acquisition of a firm which supplies inputs to the acquirer or which distributes its products) may enable the firm to cut its costs by, for example, linking together a series of sequentially related input assembly operations or reducing stockholding costs; vertical takeovers give the firm greater security of input supplies and access to distribution channels and the potential to put non-integrated competitors at a disadvantage (see VERTICAL INTEGRATION). Horizontal takeovers (the acquisition of a competitor operating in the same market) may allow the firm to reduce its costs by realizing economies of scale in production and marketing, and by taking over the rival supplier the firm can increase its market share and perhaps exercise some degree of monopolistic control over the market (see HORIZONTAL INTEGRATION).
From society's point of view takeovers may be beneficial in so far as they improve efficiency and cut costs and prices, but also (potentially) harmful if they eliminate competition and create monopolies. For this reason, in the UK, under the FAIR TRADING ACT, 1973, takeovers and mergers which lead to, or extend, a firm's market share of a particular product beyond 25%, or where the value of assets taken over is greater than £70 million, can be referred by the OFFICE OF FAIR TRADING to the COMPETITION COMMISSION to decide whether or not they are in the public interest. See MARKET ENTRY, BARRIERS TO ENTRY, CITY CODE ON TAKEOVERS AND MERGERS, BUSINESS POLICY, MANAGEMENT BUY-IN, MANAGEMENT BUYOUT, COMPETITION POLICY (UK), COMPETITION POLICY (EU).
acquisitionthe acquisition by one FIRM of some other firm. Unlike a MERGER, which is usually arranged by mutual agreement between the firms involved, takeovers usually involve one firm mounting a ‘hostile’ TAKEOVER BID without the agreement of the victim firm's management. For publicly quoted companies, this involves one company buying 50% or more of the voting shares of the other so as to exercise effective control over it, although generally the acquiring company would wish to purchase all the shares of the other company.
Three broad categories of takeover may be identified:
- horizontal takeovers, involving firms that are direct competitors in the same market;
- vertical takeovers, involving firms that stand in a supplier-customer relationship;
- conglomerate takeovers, involving firms operating in unrelated markets that are seeking to diversify their activities.
From the firm's point of view, a takeover can be advantageous because it may enable the firm to reduce production and distribution costs, acquire BRAND names, expand its existing activities or move into new areas, or remove troublesome competition and increase its market power. In terms of their wider impact on the operation of market processes, takeovers may, on the one hand, promote greater efficiency in resource use, or, on the other hand, by reducing competition, lead to a less efficient allocation of resources. In sum, they may involve, simultaneously, both benefits and detriments (see MERGER for further discussion).
Under the FAIR TRADING ACT 1973, takeovers that create or extend a firm's market share of a particular product in excess of 25%, or where the value of assets acquired is over £70 million, can be referred by the OFFICE OF FAIR TRADING to the COMPETITION COMMISSION to determine whether or not they are in the public interest. See also ASSET STRIPPER, COMPETITION POLICY (UK), COMPETITION POLICY (EU), WILLIAMSON TRADEOFF MODEL, HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, DIVERSIFICATION, CITY CODE, MARKET ENTRY.