Acquisition

An acquisition is when one company buys enough of another company's shares to take control of it. The company doing the buying is usually called the acquirer, and the one being bought is called the target. Once the deal closes, the target either becomes a subsidiary of the acquirer or is fully absorbed into it, and its stock typically stops trading on its own.

The mechanics vary. In a cash deal, the acquirer pays target shareholders a set amount per share, and those shares are cancelled in exchange for cash. In a stock deal, target shareholders receive shares of the acquiring company instead, at some agreed exchange ratio (say, 0.5 shares of the acquirer for every 1 share of the target). Some deals mix the two, offering shareholders a combination of cash and stock. Acquisitions are usually announced publicly well before they close, since they often need approval from the target's shareholders and, for larger deals, from antitrust or other regulators.

The nuance that trips people up is the gap between announcement and completion, and what happens to the price during that gap. When an acquisition is announced, the target's stock price usually jumps toward the offer price but rarely reaches it exactly, because the deal might fall through, take a long time to close, or get renegotiated. That gap is called the "deal spread," and traders who try to profit from it are doing what's known as merger arbitrage. It's also easy to confuse an acquisition with a merger; in practice the two words get used loosely, but an acquisition implies one company clearly taking over another, while a merger suggests two companies combining as more of an equal partnership.

Another wrinkle: not all acquisitions are agreed to by the target's management. A "hostile takeover" is an acquisition attempt the target's board opposes, and the acquirer may go directly to shareholders with a tender offer instead. Most acquisitions you'll see discussed in day-trading contexts, though, are friendly deals already agreed upon by both boards.