An acquisition deal is the process of one company purchasing and absorbing another business. Acquisitions are often made for the purpose of expanding into new markets, improving production capacity, or eliminating competition. A business may also make an acquisition to avoid being left behind in a fast-changing industry. Regardless of the motivation, a successful acquisition requires careful consideration and planning to ensure that both companies can benefit from the transaction.
During the acquisition process, both parties should communicate regularly and possibly daily to ensure that the transition is smooth. This will prevent problems that can arise from the integration of business processes and systems, which can hinder productivity. An important step in the acquisition process is negotiating the terms of the transaction. The acquiring company may use a letter of intent (also known as a memorandum of understanding or term sheet) to outline the proposed key terms of agreement. This is usually non-binding and lays the groundwork for a definitive acquisition agreement.
A major reason for an acquisition is to gain access to proprietary technologies. Developing such technology in-house is time-consuming and expensive, so companies may purchase firms that already have the technology to stay competitive. For example, Google’s acquisition of Nest Labs allowed it to stay ahead in the field of smart home devices.
During an acquisition, a company should carefully evaluate the financial health of the acquired firm. Excessive debt may indicate underlying issues that could pose future risks. In addition, a firm’s purchase valuation should be in line with industry benchmarks to ensure that the deal is fair.