Difference Between Acquisition and Asset Management

Edited by Diffzy | Updated on: April 06, 2022

       

Difference Between Acquisition and Asset Management Difference Between Acquisition and Asset Management

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Introduction

To be successful in the business industry is to know the market and its trends, in and out. There’s much theoretical knowledge that needs to be practiced before one can succeed in the industry. Two of the frequently used, crucial terms for achieving this are Acquisition and Asset management. While both the concepts involve finances, there’re an enormous amount of differences between them. To eliminate any confusion, let us unpack and look closer at these two concepts and how they are different.

Acquisition vs. Asset Management

The main difference between acquisition and asset management lies in its definition. An acquisition refers to the process of procurement of a company by another company, smaller or larger than the first company, for several financial benefits. The acquiring company follows a strategic plan to buy out shares, either majority or all, making the target company their subsidiary. On the other hand, Asset management refers to the practice of maintaining and operating assets in a way that is most profitable to the client. This involves rigorous analysis of the market and is particular to the trends that are prevalent in the certain time the investments are made.

Difference between Acquisition and Asset Management in Tabular Form

Table: Acquisition vs. Asset Management
Parameters of Comparision
Acquisition
Asset Management
Definition
Acquires a company, by purchasing 50% or more of a target company’s shares.
Developing, operating, maintaining, and trading assets in the most profitable way.
Intent
To expand the company and ensure by purchasing other franchises or companies.
To have a better track and organization of assets, eventually yielding the most benefits.
Assets
An acquisition can be made due to assets or due to other factors such as customer base, technology, ideas, or brand value of the target company.
Asset management only involves the juggling of assets.
Involvement of parties
Both the acquiring party and the target party are involved in the process of acquisition.
Asset management of a company or a financial institution is relevant only to that particular company.
Need for tracking
There is no tracking required in the process of acquisition.
Asset management requires tracking the assets and shares of the company.

What is Acquisition?

An Acquisition can be defined as a strategic corporate move where one company buys out the majority of the shares or all the shares of the target company. This results in the buyer company acquiring control over all the assets that are newly acquired following the acquisition and also allows it to make decisions regarding the assets without any interference or the permission of the target company. Acquisitions are done when a company purchases more than 50% of the shares of the target company.

Why form Acquisition?

There are several reasons why companies make acquisitions. Let’s drill closer into why the acquisition is usually performed-

  1. To expand customer base - Companies can have different customer bases, both foreign to each other or with a considerable quantity of similar customers. With the enforcement of an acquisition, both the separate customer bases are acquired and the company can now serve a higher audience. This not only increases the revenue but also has the potential to attract new customers far quicker and easier.
  2. Higher economies of scale - Larger companies can buy materials in bulk and allow the smooth running of operations by cutting down on labor and time. This increases the efficiency of the company’s operations.
  3. Decreased barriers - A company can acquire another company that belongs to its area of expertise or a completely different niche. For example, consider two individual companies, one that sells paper and one that sells printers. The company might have trouble attempting to start a franchise from scratch as it will take an enormous amount of time in constructing customer bases, network distribution, and advertise the business. The company that sells printers can acquire the company that sells paper, resulting in the company starting a newer franchise with a minimal amount of effort. This can not only cut costs but also reduces manual labor to a great extent.
  4. Geographical diversity - A company having concentrated power and a higher number of branches in a particular area can seem a potential target. This might occur due to the higher loyalty of the customers to the company. Thus, any other company might have to face higher competition in spreading their businesses in that area. This gives the outsider companies a stronger reason to try and acquire the local company i.e., the target company.
  5. Higher market share - When a company acquires another company, it gains a combination of shares of both companies.
  6. Increased market power - A company’s strength is displayed through its revenues, the loyalty of its customers, the quality, and its network distribution. Following the process of an acquisition, the acquiring company automatically increases all the parameters mentioned above and more. The company will be robust, leading to other companies posing lesser challenges to the acquiring company.
  7. To obtain fresh technologies and ideas - The association of different companies can always give rise to newer perspectives on a business strategy or complications to help develop a solution that can collectively help both companies. The companies can together form a team of experts that can share ideas of the highest efficiency. It also helps when the target company has implemented a newer technology for quite some time while the acquirer company hasn’t. This helps the acquirer cut costs and save time and energy as they wouldn't have to make an effort in implementing the technology all over again.

How is an Acquisition formed?

There are several steps in the process of an acquisition, starting from the company deciding to form one:

  • Devising the strategy of the acquisition.
  • Calculate and establish the criteria for selecting the target company.
  • Discovering potential targets and evaluating the targets.
  • Formulating a plan and negotiating the deal.
  • Concrete discussions regarding the contract.
  • Financing the deal and closure.
  • Further discussion and actions regarding the acquisition and balancing the finance.

What are the challenges that can be faced?

  1. Conflict in principles - Two companies can have different objectives and acquisitions can lead to unnecessary troubles amongst them. One company can aim to have better network distributions while the other to have a cost-efficient system. While these principles do not have to be necessarily mutually exclusive, it can be quite a distress to solve this problem and streamline the employees to a middle ground.
  2. Culture clash - The culture that a company enforces upon the employees plays a vital part and can have a great impact on the efficiency of the company. Managers can have different management styles and this move can cause the acquisition to have quite a rocky start. The employees can find it hard to settle into a new atmosphere in the workplace, leading to a decrease in the company’s performance and mental health of the employees.
  3. Poor results - The result of an acquisition depends entirely on how the customers react to this collaboration of brands. If the customers like the acquisition, the company can gain great popularity and hit it off in the market. On the other hand, it can also fail greatly if the customers lose interest and neither of the companies will be benefited from this.

What is Asset Management?

Asset Management involves the systematic approach of developing and maintaining the assets of a company by operating, trading, and selling them in a manner that will benefit the financial institution the most. One needs to have a good knowledge of marketing and the banking industry to make the most profit out of their assets. Thus, a company needs to know where its most beneficial and significant assets lie. There are two basic kinds of assets:

  1. Fixed or Non-current assets - The assets acquired with the purpose of long-term usage.
  2. Current assets - Assets that are acquired for short-term usage and can easily be converted to cash within a short period are known as current assets.

Many professionals offer their services of asset management through their expertise. They generally work individually or through a firm as a group of people and are called advisors or portfolio managers.

Asset management aims towards increasing the value of an investment and maximizing it over time while maintaining a mitigable amount of risk. Every investment comes with a calculated amount of risk. Thus, a client must first be questioned about the amount of risk they’re willing to take. A young investor might side towards assets that involve higher amounts of risks whereas an older person or a retired person might want to go with more generic investments, involving lesser risks. While most clients fall somewhere in the middle, asset managers must try to find what is good for a client and what asset will bring them the most benefits. Asset managers must know the prevailing market trends, stocks, real estate, and other such financial concepts that make up the investment industry. Proper rigorous research is expected of financial advisors on the above topics to perform appropriate asset management.

Why is asset management required?

  1. Easy tracking - Asset management helps organize your assets in the most profitable manner, both fixed and current assets. The company can easily keep track of vital information such as where the assets are invested exactly, the list of changes and modifications, etc. in order to manage them proficiently.
  2. Minimization of ghost assets -  Ghost assets are those assets that do not bring in any real profit to the company or do not prevail in the current market trend. To perform asset management means to know which assets are the most significant. This way, it is easy to weed out the unwanted assets and also purchase and develop the investments that make the most profit.
  3. Manage risks - While every investment is accompanied by some amount of risk, it is much better to know and manage risks with the help of an advisor. An expert can help calculate if the amount of risk in a certain investment can be undertaken or not. This helps the client understand their shares better and make a wise decision.

Main Differences Between Acquisition and Asset Management In Points

  • An acquisition describes the process of buying shares in a company by another company, smaller or larger than the first company, for several financial benefits. The acquiring company follows a strategic plan to buy out shares, either majority or all, making the target company their subsidiary. On the other hand, Asset management refers to the practice of maintaining and operating assets in a way that is most profitable to the client. Asset managers need to perform rigorous analysis of the market and are particular to the trends that are prevalent in the certain time the investments are made.
  • Acquisitions are performed for various benefits that help the finances of both the acquiring company and the target company. This benefits both the companies in increasing their customer base, expanding their company, increasing the market power, etc.
  • Asset management involves maintaining and expanding the assets of a company in the most profitable manner. It only involves assets of that particular company. An acquisition, however, may or may not involve just assets as it works either way.
  • An acquisition involves both parties i.e., both the acquiring company and the target company. Both the companies will have several changes in the company along with their work culture, finances, business strategies, work objectives, company principles, etc. On the other hand, Asset management only involves the participation of that particular company whose assets are being managed. There isn't any other involvement besides that of a financial advisor if required.
  • There is a tracking process involved in the practice of asset management whereas acquisitions do not require any sort of tracking.

Conclusion

Asset management aims to increase the value and grow the potential of a company’s assets in the most profitable way. An acquisition means buying out shares of a target company for several financial benefits that will profit both companies. While both of these concepts include a certain factor of risk in different contexts of risk, It is necessary for anyone in the finance industry with large companies to understand these concepts through and through to achieve the company’s objectives.

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"Difference Between Acquisition and Asset Management." Diffzy.com, 2022. Tue. 24 May. 2022. <https://www.diffzy.com/article/difference-between-acquisition-and-asset-management-57>.



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