Acquisition
An acquisition is a corporate transaction in which one company — the acquirer — purchases a controlling stake in or the entire ownership of another company — the target — either through purchasing its shares, assets, or through a merger agreement.
Acquisitions are a primary mechanism through which companies grow inorganically — purchasing capabilities, customers, technology, or market share that would take years to build organically. The U.S. M&A market processes thousands of transactions annually across all size ranges, from small bolt-on acquisitions of private startups to multi-hundred-billion-dollar transformational deals. The acquirer can purchase a target through a negotiated agreement with the target's board, or through a hostile bid made directly to shareholders without board approval.
Acquisitions can be funded with cash (the acquirer pays cash for each share of the target), stock (the acquirer exchanges its own shares for the target's shares), or a combination. Cash deals provide certainty of value to target shareholders but require the acquirer to have substantial liquidity or access to debt financing. Stock deals can be tax-free for target shareholders under certain conditions (a 'tax-free reorganization' under Section 368 of the Internal Revenue Code), but expose them to the risk that the acquirer's stock declines before the deal closes. The mix of cash and stock in a deal often reflects tax planning, balance sheet constraints, and the acquirer's confidence in its own stock price.
The premium paid above the target's pre-announcement stock price is called the 'acquisition premium' or 'takeover premium.' Historically, acquirers pay 20–40% above the unaffected stock price — compensating target shareholders for the loss of their standalone ownership in exchange for the certainty and liquidity of cash or the strategic upside of the combined entity. Academic research ('winner's curse') consistently shows that acquirers on average pay too much; acquiring company stocks typically decline on announcement day while target stocks surge.
Due diligence is the investigative process through which the acquirer examines the target's financial statements, legal obligations, contracts, intellectual property, technology infrastructure, and employee agreements before finalizing the deal. Surprises discovered in due diligence can lead to price reductions (purchase price adjustments), additional representations and warranties, escrow arrangements, or deal termination. Investment bankers, lawyers, and accountants from both sides participate in an intensive process that can last weeks to months.
Federal securities laws require extensive disclosure for public company acquisitions. The acquirer must file with the SEC a Schedule TO (tender offer statement) if pursuing a tender offer, or the parties jointly file a proxy statement/prospectus (Form S-4 or proxy card) for a merger requiring shareholder votes. These filings disclose the deal terms, financial projections, fairness opinions, board deliberation history, and potential conflicts of interest — providing transparency to shareholders as they decide whether to approve the transaction.