An acquisition deal is a financial transaction between two companies where one is purchasing the assets of another company in order to improve its own business. This can be a great way for companies to enter new markets, gain market share, or cut out competition. It can also be an effective tool for diversifying a product or service line, or acquiring access to new technologies that would be cost-prohibitive to develop in-house. An example is Google acquiring Nest Labs for its smart home technology.
Developing an acquisition strategy is a critical first step in this process, as is the identification of potential targets that meet your strategic profile. Due diligence is typically performed by your investment banker and deal accountants, who will conduct a thorough review of the target’s finances and operations. They may develop detailed models to evaluate returns, establish benchmarks, and negotiate key terms with the target.
They will examine the purchase valuation, ensuring it aligns with industry-specific metrics. They will assess the target’s debt obligations, looking for excessive liabilities that could pose future risks. They will also evaluate legal matters to ensure the target is free from any pending litigation or other issues that could affect its solvency after acquisition.
It is also important to analyze how the purchase will be financed, including cash, proceeds from newly incurred debt, stock or a combination of these. The use of debt will impose a drag on earnings in the form of interest expense and must be incorporated into the total acquisition costs and projected synergies.