Defensive Acquisition

Defensive acquisition is a corporate finance strategy describing the acts of firms acquiring other firms and assets as a "defense" against market downturns or possible takeovers. A defensive acquisition contrasts with the normal impetus for an acquisition, which is usually increased market share or revenue.

A company will sometimes engage in a defensive acquisition strategy by purchasing smaller firms that are in the same business. By acquiring these firms, the company protects itself from takeovers from other companies, which, as a result of antitrust laws, may not be able to merge with the enlarged company without creating a monopoly.

If a North American car company acquired an SUV company as a result of the projected rise in demand for SUVs, this would be an example of a defensive strategy through the purchase of assets.

It's not uncommon for defensive acquisitions to be financed predominantly with debt financing. The growth of the private equity and venture capital markets has significantly contributed to the rise in debt-based corporate mashups. New debt can make a new business entity unattractive to potential aggressors because of the added debt burden.

Empirical analysis of specific acquisition strategies offers mixed insight, mainly because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. Adding to the confusion is the stated strategy may not even be the real one: companies regularly hype up a variety of strategic benefits from acquisitions that are really entirely about cost-cutting.

As an example, defensive acquisitions may include Facebook's $19 billion takeovers of WhatsApp in 2014 and nearly $1 billion acquisition of Instagram in 2012. In both instances, Facebook was working on or had similar capabilities, but the built-in user bases and growing competitive threats from each made a defensive acquisition an attractive opportunity.