Mergers and Acquisitions: What’s the Difference?

Now and then, as you peruse newspapers or scroll through online news, you’ll come across stories of companies delving into mergers and acquisitions (M&A). Globally, M&A strategies serve as pivotal tools in the business world, offering opportunities to bolster market presence, broaden customer reach, alleviate competition, and venture into new markets or product sectors.

In this discussion, we will delve into the concepts of mergers and acquisitions, highlight the distinctions between these two strategies, and explore how both exert influence on stock prices. Continue reading to gain insights into this dynamic aspect of the corporate world.

What is a Merger?

A merger is a corporate system in which two or more separate companies combine to form a single new entity. This consolidation involves the integration of the assets, procedures, and rights of the merging corporations. The primary aim of a merger is to create a stronger, more competitive, and often more diversified organization that can benefit from economies of scale, increased market share, and improved efficiency.

Types of Mergers

There are several types of mergers, including –

1. Horizontal Merger – This kind of merger happens when two corporations working in the same or similar industries and offering similar products or services combine. The purpose is usually to reduce competition and improve market power.

2. Vertical Merger – In a vertical merger, two companies from various phases of the supply chain come together. For example, a manufacturer may merge with a distributor or a retailer to streamline operations and control the entire production and distribution process.

3. Conglomerate Merger – Conglomerate mergers concern corporations that work in irrelevant industries or sectors. The purpose is to broaden the business portfolio and decrease danger by joining new markets.

4. Market Extension Merger – In this kind of merger, companies serving the same market but in different geographical regions merge to extend their spread.

5. Product Extension Merger – Companies with complementary product lines merge to offer a broader range of products to their customers.

What is Acquisition?

An acquisition, often referred to as a takeover, is a corporate strategy in which one company (referred to as the acquiring company or acquirer) purchases another company (referred to as the target company or acquired company) by obtaining a significant portion of its ownership or assets. Unlike a merger, where two groups unite to create a new entity, in an acquisition, one company remains while the other is absorbed or becomes a subsidiary of the acquiring company.

Types of Acquisition

There are several types of acquisitions, including –

1. Asset Acquisition – In an asset acquisition, the contracting company buys specific assets and liabilities of the target company, instead of accepting the whole company. This allows the acquirer to select the assets it wants and avoid taking on unwanted liabilities.

2. Stock Acquisition – In a stock acquisition, the acquiring company buys the shares or stock of the target company’s ownership. This often results in the target company becoming a fully-owned subsidiary of the acquirer.

3. Friendly Acquisition – A friendly acquisition happens when the target corporation’s leadership and board of directors approve of the acquisition. This typically involves negotiation and understanding the terms and conditions of the deal.

4. Hostile Takeover – In contrast, a hostile takeover happens when the target company’s management and board of directors resist the acquisition, but the acquiring company proceeds with the purchase by directly approaching the target company’s shareholders.

5. Vertical Acquisition – This type of acquisition involves the purchase of a company operating in a distinct set of the supply chain, such as a supplier or distributor.

6. Horizontal Acquisition – A horizontal acquisition occurs when the acquiring company buys a competitor operating in the same industry or offering similar products or services. The aim is often to decrease competition and grow market share.

Key Differences Between Mergers and Acquisitions

Mergers and acquisitions (M&A) are both techniques utilized by companies to gain specific business objectives, but they differ significantly in their execution and outcomes. Here are the key differences between mergers and acquisitions –

1. Definition

● Mergers – In a merger, two separate companies come together to form a single new entity. It’s essentially a combination of equals.

● Acquisitions – In an acquisition, one company (the acquiring company) purchases another company (the target company) and absorbs it, often resulting in the target company becoming a subsidiary of the acquirer.

2. Ownership

● Mergers – In mergers, ownership is typically shared between the two merging entities. Both companies’ shareholders become shareholders of the new entity.

● Acquisitions – In acquisitions, the acquiring company gains full ownership of the target company. The target company’s shareholders may receive compensation in the form of cash, stock, or a combination.

3. Legal Structure

● Mergers – Mergers often require legal consolidation, where the current companies stop to exist, and a new entity is created.

● Acquisitions – Acquisitions usually involve the purchasing company maintaining its legal identity, while the target company’s legal identity may change or continue as a subsidiary.

4. Control

● Mergers – Mergers imply shared control and decision-making between the merging entities, as they become part of the same entity.

● Acquisitions – Acquisitions result in the acquiring company maintaining full control over the target company, which operates as a separate entity under its oversight.

5. Purpose

● Mergers – Mergers are often driven by the desire to combine strengths, resources, and market presence to create a more formidable entity. The aim is to achieve synergy.

● Acquisitions – Acquisitions are typically motivated by strategic objectives, such as gaining access to new markets, acquiring specific technologies, eliminating competitors, or expanding the product or service portfolio.

6. Approval and Process

● Mergers – Mergers require approval from both companies’ shareholders and regulatory authorities. The process can be more complex due to the creation of a new entity.

● Acquisitions – Acquisitions require approval from the target company’s shareholders and regulatory authorities. The process may be comparatively straightforward, as it involves a change in ownership rather than the creation of a new entity.

7. Cultural Impact

● Mergers – Mergers often involve integrating the cultures, values, and workforces of both companies, which can be challenging.

● Acquisitions – Acquisitions may lead to cultural clashes if not managed properly, as the target company’s culture may differ from that of the acquiring company.

In summary, mergers and acquisitions represent distinct strategies with different implications for ownership, control, legal structure, and purpose. Understanding these key differences is essential for companies considering either strategy as part of their growth or strategic objectives.