An acquisition occurs when one company buys another company. Often you’ll see in the newspaper the words acquisition, merger or consolidation. It just means two companies are coming together to make one company.
During the late 1990s WorldCom’s strategy was to grow through acquisition. Trouble was, the company wasn’t generating enough cash for the acquisitions it wanted to make. So it used stock as its currency and paid for the companies it acquired partly with WorldCom shares. That meant they absolutely had to keep its share price high; otherwise, the acquisitions would be too expensive.
Another company that grew through acquisitions was Tyco International. In fact, they bought some six hundred companies in just two years, or more than one every working day. With all those acquisitions, the goodwill number on Tyco’s balance sheet grew to the point where bankers began to get nervous. Bankers effectively shut the company off from further acquisitions immediately.
(Excerpts from Financial Intelligence, Chapter 11 – Assets)
You agree to buy MJQ for $5 million. Since you are buying a collection of physical assets (among other things), you will appraise those assets the way any buyer would. Maybe you find that MJQ’s buildings, shelving, forklifts, and computers are worth $2 million. That doesn’t mean you made a bad deal. You are buying a going concern with a name, talented and knowledgeable employees, and so on, and these so –called intangibles can in some cases be much more valuable than the tangible assets. (How much would you pay for the brand name Coca-Cola? Or for Dell Computer’s customer list?)