The acquirer is the company initiating the takeover or acquisition of a target company. In a corporate acquisition, the acquirer is the company purchasing another company for a specified price. These acquisitions are usually agreed upon by two parties (but may involve additional partners). It is not always necessary for he acquirer to purchase the entire target company. Some tie a “significant” stake will be acquired of perhaps 51% of the voting stock.
In addition, even though a deal may be “agreed” upon and known as a friendly takeover, they can at times be considered hostile acquisitions. For example Vintage Capital’s pursuit of Red Robin Gourmet Burgers (RRGB). When the acquisition process is completed, it allows an acquiring company to take control of a business for a specified price, having paid a control premium, or acquisition premium in the market to the target shareholders. The acquiring company believes they can gain from synergies by absorbing the target company and integrating it into their own business. Although rarely the target may be operated as a subsidiary or stand alone entity.
In the case of a “merger of equals” the acquirer is slightly more difficult to define. This is because the shareholders of both companies will end up as part owners of the new or surviving entity. The business combination may have been suggested by either party for a variety of reasons. The acquirer may pursue a mergers & acquisitions strategy to gain access to new markets or because they covet some new technology held by the target. Alternatively, the target may seek new growth opportunities requiring large amounts of capital or they may be experiencing financial troubles and put themselves up for sale. However, generally, the acquirer is referred to as the company which is the dominant firm amongst those involved, or the largest, but may also refer to the firm that initiated the transaction.
Acquirer Performance
In acquisitions involving public companies, the acquirer often sees a short term underperformance in its stock price during and following the acquisition. This underperformance is relative to the appropriate sector benchmark and may be difficult to observe in a rising market or in times of heightened market volatility. The drop in the acquirer share price is usually due to the uncertainty of the future success of the transaction. Additionally, acquirer shareholders tend to question the level of acquisition premium paid by the acquirer to target stockholders thus reducing their own potential gains.
This underperformance may be further exaggerated if the deal is financed by acquirer stock. This requires the short selling of the acquirer stock using the exchange ratio by merger arbitrageurs to lock in the value of the merger spread. The subsequent dilution in the acquirer once the new stock is issued further adds to the downward pressure on the share price.
Acquisiton Example
In the case of the Fitbit (FIT) takeover by Google (GOOG, GOOGL), it is clear Google is the acquirer. In this example and in many official documents, the “acquirer” is often referred to as the parent. The following text is taken from the Form DEFM14A Definitive proxy statement relating to merger or acquisition filed by Fitbit with the SEC,
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of November 1, 2019, is entered into by and among Fitbit, Inc., a Delaware corporation (the “Company”), Google LLC, a Delaware limited liability company (“Parent”), and Magnoliophyta Inc., a Delaware corporation and a wholly owned Subsidiary (as defined below) of Parent (“Merger Sub”).
Once the trader identifies the parent, the investment analysis regarding merger arbitrage trading can begin. In this respect, such issues as acquirer reputation, ability to close deals and financing sources must be considered when analyzing the deal. In the case of Google and Fitbit these issues are quite straightforward although regulatory aspects may prove more difficult to overcome.
