What is acquisition: Types, Methods & Impact on Business Growth

A business acquisition happens when one company buys another company’s shares or assets to take control and grow faster. It helps businesses expand quickly, enter new markets, or gain new skills.

Rahul’s Acquisition Story: An Example

Rahul owns TechSolve, an IT company in Bangalore that earns 50,000,000 rupees every year. He found a smaller company in Mumbai called CodeEdge with 10,000,000 rupees revenue and strong clients in western India.

Rahul bought CodeEdge for 15,000,000 rupees, which is about 1.5 times their yearly revenue, a common price in the Indian tech sector.

This deal increased TechSolve’s revenue by 20 percent, added 40 new clients, and brought in 25 skilled developers. It helped Rahul enter the western India market quickly and saved 1,500,000 rupees every year by sharing resources.

This acquisition helped Rahul grow his business faster and stay ahead of competitors.

Types of Acquisitions: Horizontal, Vertical, and Conglomerate Explained

When companies want to grow by buying other businesses, they can choose different types of acquisitions. Knowing these types helps them pick the best way to expand, reduce risks, or improve their position in the market.

1. Horizontal Acquisition

Definition and Characteristics: A horizontal acquisition occurs when a company buys another company that operates in the same industry and is at the same stage of the supply chain. Essentially, it’s a merger of competitors or businesses that offer similar products or services.

Benefits:
 

• Increases market share by combining customer bases
   
• Reduces competition by consolidating players in the market
   
• Enables economies of scale and cost efficiencies

Example:
Facebook’s acquisition of Instagram in 2012 is a classic example. Both companies operate in social media, and by acquiring Instagram, Facebook expanded its market dominance and reduced competition.

2. Vertical Acquisition

Stages of Supply Chain Involved: Vertical acquisitions happen when a company acquires another company that operates earlier or later in the supply chain. This means the acquiring company controls more stages of the production or distribution process.

Benefits:
 

• Cost control by reducing supplier or distributor margins
   
• Improved supply chain efficiency and coordination
   
• Greater control over quality and timing

Example: Apple’s acquisition of its chip supplier, PA Semi, is an example of vertical acquisition. By owning part of the supply chain, Apple improved its product development and reduced dependency on third parties.

3. Conglomerate Acquisition

What It Means: Conglomerate acquisitions involve companies acquiring businesses that are unrelated to their current operations. This type aims at diversification rather than consolidation.

Benefits:
 

• Diversifies business risks across different industries
   
• Opens new revenue streams unrelated to the core business
   
• Can stabilise earnings during industry downturns

Example: Berkshire Hathaway, led by Warren Buffett, has acquired companies in various unrelated industries such as insurance (GEICO), railroads (BNSF Railway), and food (Dairy Queen). This spread reduces the overall business risk.

Comparison of the Types:

Here is the quick comparison for your better understanding:
 

Choosing the right type of acquisition depends on what the company wants to achieve. Picking the right one can help a business grow and succeed for the long term.

Methods of Acquisition: Friendly vs. Hostile Takeovers

When a company wants to buy another, it can do so in two main ways: a friendly acquisition or a hostile takeover. Knowing the difference helps companies plan better and avoid problems.

1. Friendly Acquisition

What It Is: A friendly acquisition happens when both companies agree on the deal. They work together and plan how to combine their businesses smoothly.

Example: In 2023, Tilaknagar Industries bought the Imperial Blue whisky brand from Pernod Ricard for 4,150 crore rupees. Both companies agreed, so the deal went smoothly.

Benefits:
 

• Easy to combine teams and systems
   
• Less conflict and better teamwork
   
• Decisions are faster because both sides cooperate.
   

2. Hostile Takeover

What It Is: A hostile takeover happens when the buying company tries to take over without the other company’s agreement. They often make offers directly to the shareholders or try to replace the management.

Example: In 2019, Larsen & Toubro (L&T) bought control of Mindtree, even though Mindtree’s leaders did not agree. L&T bought enough shares from the market and shareholders to take over the company.

Common Ways They Do This:
 

• Offering to buy shares directly from shareholders at a higher price
   
• Trying to get shareholders to replace the company’s board
   
• Buying shares quietly on the stock market

Benefits:
 

• They get control faster
   
• They may pay less if the company is undervalued

Risks:
 

• The company’s leaders and workers may resist
   
• There could be legal fights
   
• Combining the two companies can be harder
   

Comparing Friendly and Hostile Takeovers:

Here is a table for better understanding while comparing both friendly and hostile takeovers:
 

Choosing between friendly and hostile methods depends on the situation and goals. Friendly deals are easier and less risky, but hostile takeovers can work if the target company resists strongly.

How Acquisitions Drive Business Growth: Key Benefits?

Buying another business helps companies grow faster. It gives access to new customers, lowers costs, adds skills and technology, and makes the business stronger.
 

1. Market Expansion: Acquisitions help companies enter new areas or reach new types of customers.

Example: In 2023, ITC bought Yoga Bar and later 24 Mantra Organic to expand into the health food market. This helped ITC reach health-conscious buyers and grow faster.

2. Economies of Scale: When two companies join, they can reduce costs by sharing resources.

Example: Vodafone India and Idea Cellular merged in a deal worth around $23 billion. By combining networks and staff, they saved money and served more customers.

3. Access to New Talent and Technology: Buying another company often brings in skilled staff and new tools or systems.

Example: Sun Pharma bought Ranbaxy in a deal worth $4 billion. It gained access to new research teams, drug products, and global markets.

4. Diversification of Products or Services: Acquisitions allow companies to add different products and reduce risk.

Example: Tata Group has bought companies in cars (Jaguar Land Rover), groceries (BigBasket), and more. This means it doesn't rely on just one industry.

5. Increased Competitive Advantage: Buying a company can make the business stronger and more competitive.

Example: After buying Ranbaxy, Sun Pharma became India’s largest drug company and one of the biggest in the world. It gained more customers and a wider product range.

Note: Acquisitions help businesses grow quickly. They can:
 

• Reach new markets
   
• Lower costs
   
• Add new skills and technology
   
• Offer more products
   
• Compete better in the market
   

These advantages make acquisitions a smart choice for many growing companies.

Challenges and Risks Involved in Business Acquisitions

While acquisitions help companies grow, they also bring risks. If companies don’t plan properly, these deals can fail to deliver the results they expected.

1. Integration Challenges: After an acquisition, both companies must merge their systems, teams, and processes. This can be slow and messy. Staff may not know how to work with new systems, and managers may struggle to align operations.

Example: When Vodafone and Idea merged, they faced major integration problems. Network systems, billing platforms, and staff structures took years to align, which slowed progress.

2. Cultural Differences: Different work cultures can lead to misunderstandings and low morale. One company may have a strict structure, while the other is more relaxed. Staff may resist change or feel uncertain about their future.

Example: Many mergers in India fail because the new parent company doesn’t understand or respect the culture of the business they acquire. This often causes friction and high staff turnover.

3. Financial Risks: A company might pay too much or find hidden problems after the deal, like unpaid taxes, legal issues, or large debts. This can cause big losses.

Example: Bharti Airtel’s $10.7 billion acquisition of Zain’s African operations seemed promising. But later, Airtel struggled with high debt, local market problems, and low profits.

4. Regulatory and Legal Issues: In India, deals must get approvals from regulators like SEBI and the Competition Commission. Legal delays or objections can slow or cancel a deal.

Example: In 2023, the Supreme Court reversed JSW Steel’s ₹19,700 crore acquisition of Bhushan Power & Steel due to issues in the insolvency process. This shocked the business world and raised concerns about deal security.

5. Potential for Failure: Not all acquisitions work out. Sometimes, the new business doesn’t grow as expected or creates more problems than benefits.

Example: Shree Renuka Sugars bought two companies in Brazil to grow globally. But drought, poor planning, and high debt made the deal a failure. The company later had to restructure.

To avoid these problems, companies need careful planning, expert advice, and open communication with staff.

Conclusion

An acquisition is when one company buys another to grow faster, enter new markets, or improve what it offers. It can bring big success, but only if the company plans well, understands the risks, and makes sure the two businesses work well together.

FAQs
 

1. Why do companies buy other companies instead of starting from zero?

They do it to save time, reduce risk, and get quick access to new customers, products, or technology. Building from the ground up takes years, but buying a company gives them a head start.

2. Can small businesses also make acquisitions?

Yes. A small business can buy a local competitor, a supplier, or a brand. This helps them grow quicker, add new services, or cut costs.

3. What happens to employees after an acquisition?

Some employees stay in the same role, while others may face changes. If the companies plan well, the staff may find new chances to grow. But if not, there can be confusion or even job losses.

4. Is investing in a company during an acquisition a good idea?

It depends. If the deal looks strong and both companies fit well, the value might go up. But if the deal faces legal issues or doesn't work out, the value could fall. Always research before investing.
 

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