Acquiree

Acquiree

What is an acquiree?

An acquiree, also known as a target firm, is a company that is purchased under a corporate acquisition.

Companies buy other companies for a number of reasons. They may be aiming to achieve greater economies of scale, diversify, expand internationally, increase market share, enhance synergies, or reduce costs. Other motivators include the acquisition of new technologies and the reduction of overcapacity and market competition.

The price of the acquiree

The purchase of a company almost always requires an offer of a price which exceeds the fair market value of the property. Acquirees rarely give up easily what they have built. Of course, acquirers take future potential into account when making an offer, paying a little more to ensure that the deal gets shareholder support.

Typically, the acquired company will see a short-term change in the price of its shares to reflect the price per share offered by the acquirer.

The agreed price per share must be immediately reflected in the price of the acquired company's shares. Since most targets are purchased at a premium, this means that stock price usually goes up as soon as news spreads that an offer has been submitted.

Features of an ideal acquiree

Several factors will make a company an ideal acquiree.

     1. Geographic proximity

An acquisition is smooth, when the acquirer has ways to save money and minimize the expenses. Great location or enough warehouses can reduce the overheads.

     2. Clean operating history

A clean operating history means that the target company has stable sources of income and stable operations. Clearly, acquirers want the acquisition to go smoothly, and they avoid companies that have filed for bankruptcy or lost major customers in the past.

     3. Uptrend of shareholder value

Acquirers are not only interested in businesses that will thrive as part of a larger corporation. They also care about the ability of the acquired company to operate as an independent organization. Companies that can increase their shareholder value are the most attractive.

     4. Experienced management

In some instances, when one company acquires another, the management team is replaced with a new one. However, in many situations, the management is retained because of their experience in running company activities. Therefore, many acquirers are interested in whether the acquiree is well run. Good stewardship serves as evidence that the target company's assets are likely in good condition and that its client/customer base is content.

In some cases, when one company acquires another, the management team is replaced by a new one. However, in many cases, management is retained due to their experience in managing the company's operations. Good governance indicates that the target company's assets are likely to be in good condition and that its customer base is satisfied.

     5. Minimal legal threats

Most acquirers stay away from companies that have or faced an excessive number of lawsuits, even though at some point almost every company faces situations that require litigation. Thus, the acquirer minimizes the risk of the investment in the target company.

     6. Expandable margins

By increasing its sources of income, the company gains economies of scale. This means that while its revenue and profits are increasing, its overheads such as rent, utility bills, and payments to suppliers and employees are minimized or remain constant. An acquiree that shows the potential to improve economies of scale is more attractive. It’s preferable to acquire a company with a solid cost structure and a feasible plan to increase revenue.

     7. Strong distribution network

Having a reliable distribution network is especially important for targeted companies operating in the manufacturing industry. The acquirer wants to know how many sales the company makes and how it sells its products. An acquiree that is able to create its product in a cost-effective manner and then deliver it to its customers in a timely manner is the best acquisition candidate.

The example of successful acquiree

The most recent example of a much talked-of acquisition is Microsoft’s purchase of Activision Blizzard.

In January 2022, Microsoft announced its intention to acquire Activision Blizzard. According to the  preliminary information, the deal will amount to about $70 billion, and its result should be the transition of Activision Blizzard under the wing of Microsoft Gaming. To complete the transaction, a permission from antitrust regulators is required. Until the merger is completed, Activision Blizzard will remain independent, and if the sale fails, it will receive compensation in the amount of $3 billion.

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2022-07-26 • Updated

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