An acquisition deal is a business transaction in which a company buys the ownership of another company. Whether through cash, stock or the assumption of debt, companies pursue acquisitions as part of their growth strategies. They may seek to acquire a larger market share, increase operational efficiency, eliminate competitors or gain entry into new markets.
In a typical purchase, the acquiring company pays for the assets of the acquired business and assumes any liabilities. However, the acquiring company can choose to structure a deal as an asset sale or purchase in which it cherry-picks only the assets and avoids the corresponding liabilities. This structure is often used for acquiring a business with existing, well-established brands. For example, the fashion retailer HBC recently purchased Neiman Marcus and its brands, assuming only the associated liabilities while keeping those brands separate.
The valuation of an acquisition is a complex undertaking and can be impacted by numerous factors including, but not limited to:
Working Capital:
Acquiring a company often results in a change in the amount of working capital. Depending on how this is handled, the debt-free assumption of Enterprise Value can end up being deferred into Working Capital which then affects EBITDA. Moreover, a high working capital adjustment can result in an upward Equity Value deduction while a low working capital adjustment can create a downward Working Capital Adjustment. These adjustments need to be carefully managed and accounted for during the valuation process.
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