Company acquisitions in construction
Acquisitions, together with mergers, are major strategic initiatives that can be undertaken by organisations wishing to grow, or change their structure. Also known as takeovers, acquisitions involve one company taking a controlling interest in another. Mergers on the other hand involve combining companies to form one single company, where the two original companies cease to exist and a third company is created.
In the construction industry, acquisitions are commonly used as means of accelerating growth, reducing the effects of the construction boom and bust cycle, entering into new markets, and spreading risk. Acquisitions can also allow expansion into the global construction market by increasing the depth of international expertise and the business portfolio.
It is generally expected that acquiring a company will result in a bigger organisation. Akintoye and Skitmore examined the effect of firm size on returns over the period 1980-1987. They concluded that larger firms have persistently higher rates of return that are attributable to greater managerial efficiency.
There are several different types of acquisition:
- Friendly takeover: An acquisition that is approved by management and shareholders.
- Hostile takeover: An acquisition that does not have the approval of management but is pursued by the bidding company anyway.
- Reverse takeover: Where a private company acquires a public company.
- Backflip takeover: Where the acquiring company turns itself into a subsidiary of the purchased company, for example, where a larger company takes over a smaller company with an established brand identity.
Issues that an organisation might consider when assessing a possible acquisition might include; whether it will create economic gains; the type of business available; the sort of diversification required; their growth strategy; the compatibility of the two organisations and so on.
Acquisitions can have a range of impacts on an organisation, from ‘soft’ issues such as the culture of the organisation, to ‘hard’ issues such as integrating IT facilities and accounts.
Financing for an acquisition might include:
- Bank loan or an issue of bonds. Leveraged buyouts are acquisitions that are financed through debt which is often moved down onto the balance sheet of the company being acquired.
- Loan note alternatives: Allowing shareholders to take part or all of their consideration in loan notes rather than cash, which can be more attractive in terms of taxation.
- All share deals: The bidding company issues new shares to the shareholders of the acquired company, rather than paying money.
- All-cash deals: A simple acquisition for an amount of money per share.
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