wikiHow to Analyze an Acquisition

Companies often buy out other companies (called "acquisition") for several reasons. 1 company may no longer have the funds needed to continue to operate effectively and decides to sell, or 2 companies merge resources with 1 becoming the "parent" or owner of the new company. If you are an investor in a company that intends to acquire another company, there are steps you can take to analyze how the acquisition might affect your investment.


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    Determine why your company is considering buying the other company and decide whether the reasons make a good argument to do so, such as an increase in the share of the market or acquisition of a new, popular product.
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    Research several articles written by independent analysts that provide information and comments on both companies.
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    Determine why the company being sold is doing so. For example, is it losing money and, if so, why?
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    Research whether the selling company has a huge amount of debt that would need to be settled by your company. This could work in favor for your company, if it can refinance the debt at a lower interest rate, or put a financial drain on it.
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    Look up whether the selling company is a liability risk, such as whether it has any pending lawsuits.
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    Evaluate whether the acquisition adds any value to your company, such as name recognition or a good reputation for customer service that could be passed on.
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    Research whether your acquiring company will need to increase its labor, office space or other services that might add an additional financial burden to it.
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    Determine whether there would be severance expenses associated with the selling company's employees that may no longer be needed after the acquisition. This includes top executives who may have a huge vested interest in the selling company and could cost your company quite a bit of money.
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    Decide whether the 2 companies are compatible in their product line (if applicable), such as both being in the bookkeeping software business or some other similar product line.
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    Evaluate whether the acquisition streamlines any operations, such as purchasing a company that supplies parts for your product.
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    Find out the purchase price, which is usually provided to investors, to determine whether it is reasonable. The purchase price is usually based on the selling company's stock price plus some percentage over that figure.
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    Research the stock prices of the selling company to determine whether they are temporarily inflated (for the acquiring company to pay more).
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    Determine how the new company will be paid, such as in cash or stock from the acquiring company. This can provide insight into whether your company has a solid financial base with which to work and can afford the acquisition.
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    Determine how the stock earnings of your company will change by looking at both company's earning history and projections by financial analysts for future earnings after the companies merge. The projected earnings should show an increase if the acquisition is to be successful.
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    Research the background of both companies to determine their in-house cultures, worker types and operating procedures. Also determine how management of each company works with its employees and the corporate structure. This can provide insight into how compatible the 2 companies will be and whether the acquisition is amicable. A "hostile" takeover could damage your company's reputation.


  • The Securities and Exchange Commission (SEC) provides information about companies in "proxy statements" for shareholders on matters that are discussed at shareholder meetings. This is a good resource for finding out information on debt, pending litigation or stock prices. Another source is the company's "Q-10" or "10-K" reports. These reports are submitted by companies (as required) to the SEC on a regular basis and contain all pertinent information that you would need to perform an informed analysis.
  • If you cannot project, or your research doesn't provide a positive projection of stock price, you might want to consider liquidating your stock after a specific period of time after the acquisition during which you see no increase in its value, such as 1 year. Before you do this, be sure to do your research once again to determine whether projections are positive.

Things You'll Need

  • Access to public information on selling company
  • Articles by financial analysts on selling company
  • Purchase price
  • Stock price of both companies
  • Projections on the future price of stock
  • Calculator
  • Paper, pen or pencil

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