Can Companies Buy Stock in Other Companies?

Companies frequently acquire stock in other companies. This activity is a fundamental aspect of corporate strategy and financial management, allowing organizations to pursue various objectives. This practice is permissible within established legal and regulatory frameworks, provided specific guidelines and reporting requirements are met.

Strategic Motivations for Stock Acquisition

Companies acquire stock in other entities for a range of strategic reasons aimed at enhancing their market position and financial performance. One primary motivation involves gaining access to new markets or customer segments that would otherwise be difficult or time-consuming to penetrate independently. This provides a competitive advantage by expanding the acquiring company’s reach.

Another strategic driver is investment diversification, which helps spread risk across different industries or geographic regions. Acquiring stock can also facilitate synergies, leading to potential cost savings through economies of scale or increased revenue generation from combined capabilities. Accessing new technologies or intellectual property is another reason, allowing the acquiring company to integrate innovative solutions without extensive internal research and development. Forming strategic alliances through minority investments fosters collaborative efforts, while acquiring a significant stake can also serve as a preliminary step toward a full acquisition of the target company.

Classifying Stock Investments by Control

The way a company classifies its stock investment in another entity depends primarily on the level of ownership and the degree of influence or control it can exert. These classifications dictate the subsequent accounting treatment and financial reporting.

Passive Investments

Investments where the acquiring company holds less than 20% of the voting shares are considered passive investments. This indicates no significant influence over the investee’s operations or financial policies. In such cases, the investor acts as a passive shareholder, primarily interested in dividends and potential capital appreciation.

Significant Influence

When an investing company acquires between 20% and 50% of the voting stock, it is presumed to have significant influence over the investee. This influence can manifest through representation on the investee’s board of directors, participation in policy-making decisions, material intercompany transactions, or the interchange of managerial personnel. Even with less than 20% ownership, significant influence can be demonstrated if such indicators are present, necessitating a more involved accounting approach.

Controlling Investment

A controlling investment occurs when a company acquires more than 50% of the voting shares of another entity. This level of ownership grants the investing company the power to direct the operating and financial policies of the other company, effectively making the investee a subsidiary. In some instances, control can exist even with less than 50% ownership, particularly if the investing company holds a controlling financial interest through other means, such as contractual agreements or the nature of the entity’s structure as a variable interest entity.

Methods of Acquiring Stock

Companies employ several practical methods to acquire stock in other entities, each suited to different strategic objectives and market conditions.

Open Market Purchases

Open market purchases involve buying shares directly on public stock exchanges like the New York Stock Exchange or Nasdaq. These transactions occur at prevailing market prices. They are often used for smaller, non-controlling stakes or for companies repurchasing their own shares.

Private Placements

Private placements entail purchasing shares directly from the target company or existing shareholders in a negotiated, non-public transaction. This method is used for acquiring significant blocks of shares, particularly when the intent is to establish a strategic partnership or gain a substantial interest without impacting public market prices.

Tender Offers

Tender offers are a public solicitation to all shareholders of a target company, inviting them to sell their shares at a specified price, a premium over the current market value, within a defined timeframe. This method is used when an acquiring company seeks to gain a controlling interest, often with the condition that a minimum number of shares are tendered to complete the acquisition.

Mergers and Acquisitions (M&A)

Stock acquisition is a core component of larger Mergers and Acquisitions (M&A) transactions. In such deals, the buyer purchases the target company’s stock directly from its shareholders. The acquired entity becomes a wholly owned subsidiary of the acquiring company. This structure allows the acquiring company to assume the target’s existing legal entity, including its contracts and liabilities, providing continuity of operations.

Accounting for Intercompany Stock Investments

The accounting treatment for intercompany stock investments is determined by the level of influence the investor has over the investee, directly correlating with the classifications of control.

Cost Method

For passive investments, where the investor holds less than 20% ownership and does not exert significant influence, the cost method is applied. Under this method, the investment is initially recorded at its original cost. Dividends received from the investee are recognized as income by the investor.

Equity Method

When an investor holds significant influence over an investee, typically with 20% to 50% ownership, the equity method of accounting is used. The investment is initially recorded at cost on the balance sheet. Its carrying value is then adjusted to reflect the investor’s proportionate share of the investee’s net income or loss. Dividends received from the investee reduce the investment’s carrying value. This method aims to provide a more accurate representation of the investor’s economic interest in the investee’s performance.

Consolidation Method

For controlling investments, exceeding 50% ownership, the consolidation method of accounting is mandated. This method requires the parent company to combine the financial statements of itself and its subsidiary, presenting them as a single economic entity. All assets, liabilities, revenues, and expenses of the subsidiary are integrated into the parent’s financial statements. Intercompany transactions and balances are eliminated to avoid double-counting and present a unified financial picture. This approach is governed by accounting standards such as ASC 810.

Regulatory Considerations for Stock Purchases

Intercompany stock purchases are subject to various regulatory oversight mechanisms designed to maintain fair competition and ensure market transparency.

Antitrust Laws

Antitrust laws, such as the Hart-Scott-Rodino (HSR) Antitrust Improvements Act, require companies to notify the Federal Trade Commission (FTC) and the Department of Justice (DOJ) before completing certain large acquisitions. These premerger notifications aim to prevent transactions that could substantially lessen competition or create monopolies within an industry. For 2025, the HSR Act applies to transactions exceeding specific monetary thresholds for both the transaction size and the parties involved.

Securities Laws

Securities laws, enforced by the U.S. Securities and Exchange Commission (SEC), impose disclosure requirements for significant stock purchases, especially for publicly traded companies. Any person or group acquiring beneficial ownership of more than 5% of a class of registered equity securities must file a Schedule 13D with the SEC within 10 calendar days of crossing this threshold. This filing provides transparency regarding the acquirer’s identity, source of funds, and purpose of acquisition, including any intent to influence corporate control. For passive investors not seeking control, a shorter Schedule 13G can be filed instead. When a tender offer is made, a Schedule TO must be filed with the SEC, disclosing the offer’s terms and conditions.

Industry-Specific Regulations

Beyond general antitrust and securities regulations, certain industries face additional specific regulatory hurdles or require specialized approvals for stock acquisitions. These industry-specific regulations apply to sectors deemed sensitive or highly regulated, such as banking, telecommunications, or utilities, where mergers and acquisitions could have broader public implications.