Acquisitions and all the Works (Silicon Valley × LexStart)

Silicon Valley: S01E05 - Hooli acquired TeleHuman, which had developed a holographic 3D teleconferencing technology. Fancy, right? But what is “acquired” and what does it entail?

An acquisition is a corporate action through which an entity buys most or all of the ownership stakes of another entity, effectively granting control of the second entity to the first entity. An acquisition entails buying at least a fifty percent stake in the target company by the acquiring company.

An acquisition of a majority stake in the target company allows the acquiring organisation to settle on choices pertaining to the management and operations of the target without the approval of the target company’s shareholders.

An acquisition can be paid for in cash, granting the acquiring company’s shares to the target company’s shareholders, or a blend of both.

Big corporations regularly acquire startups which either complement their business or which lead innovation in a particular sector. Other reasons for acquisitions include achieving economies of scale, amassing greater market share, increasing synergy, reducing costs, and developing new niche offerings.

Acquisitions also form part of the growth strategy of most big corporations, as it a better alternative to expanding on its own. It is difficult for large corporations to keep growing without losing efficiency, and acquisitions solve this issue to a great extent. Acquisitions also provide the acquiring organisation access to new markets, client base, workforce, brand name, and other intangible resources like intellectual property.

Consequently, an acquisition may form part of the exit strategy of the investors in a startup. They often seek to grow the startup into an attractive target for acquisition by a large corporation, which usually offers them a high return on their investment and provides them a relatively easy exit when compared to other alternatives like an IPO.

Acquisitions can be friendly or hostile, depending on the willingness of the target firm to be acquired.

In India, acquisitions are governed by provisions under the Companies Act, 2013, and the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“the SEBI Takeover Code”) in case of listed companies. In addition, companies also need to comply with the antitrust laws of the jurisdiction, in this case, the Competition Act, 2002. Further, in the case of cross-border acquisitions, provisions under the Foreign Exchange Management Act, 1999 also come into play.