Mergers vs Acquisitions: The Top 10 Differences
May 17th, 2023
Mergers and acquisitions (M&A) can be strategic tools for companies seeking growth. These transactions can significantly transform an industry and contribute to the rise of new market leaders.
With so much to consider and plan, mergers and acquisitions require a deep understanding of the companies involved. Each transaction comes with its unique characteristics, challenges, and considerations. Mergers are also different from acquisitions, and the way they differ can have an impact on the businesses involved.
This article will explore the differences between the two so that stakeholders can navigate the complexities of M&As more effectively.
What is a merger?
A merger is a business transaction in which two or more companies combine to form a single business entity. In this process, the organisations combine assets, liabilities, and operations, aiming to create a more competitive company.
Since a merger can significantly affect a market, the transaction is subject to regulatory scrutiny to ensure they do not result in anti-competitive behaviour or harm consumers.
There are many different ways a merger can occur:
A horizontal merger is between companies operating in the same industry or sector. The goal of this type of merger is to increase market share and reduce costs.
A vertical merger combines companies operating at different stages of the supply chain. For example, companies that produce different materials within the same industry can merge in a vertical merger.
This type of transaction can enhance efficiency, streamline operations, and create a more integrated supply chain.
When two companies operating in unrelated industries merge, the transaction is known as a conglomerate merger. The goal is to diversify the business and reduce risk by entering new markets.
A company looking to expand operations to different countries can merge with an organisation abroad working in the same sector. By merging, they can expand the reach of both companies and access new customer bases.
Product-extension mergers occur when companies selling complementary products or services become one. This allows them to offer a broader range of items to customers.
What is an acquisition?
Acquisitions can also be referred to as a takeover or buyout. As the name suggests, in an acquisition, one company purchases another, assuming control over its operations, assets and liabilities.
This type of transaction can be friendly or hostile. It all depends on how the buying company will take control of the purchased company.
Here are a few ways in which an acquisition can take place:
1. Asset acquisition
The buyer purchases specific assets and leaves behind unwanted liabilities.
2. Stock acquisition
In a stock acquisition, a company buys the majority of the shares of another organisation, gaining control over the acquired company.
While in a merger, two companies are combined, the transaction can be considered an acquisition if one of the companies dominates the other, absorbing its activities.
4. The purpose of an acquisition
The purpose of an acquisition can vary. Companies will acquire others to expand their businesses, reduce costs or access expertise.
Some common motivations for acquisitions include:
Acquiring another company allows the buyer to expand its market, enter new geographic regions, or diversify its product or service offerings.
In this case, an acquisition aiming at a strategic expansion can help a company increase its customer base, gain a competitive advantage, or access new technologies or intellectual property.
Acquisitions can generate synergies by combining the strengths and resources of both companies. This type of buyout can help companies save money with shared infrastructure, reduce duplicate functions, or improve operational efficiency.
Acquisitions can be driven by the desire to consolidate fragmented markets or eliminate competition.
When a company acquires a competitor, it increases its market share and reduces competition.
Access to talent or expertise
A company can acquire another seeking talented employees or valuable intellectual property. Buying another company that offers all of that makes the process of growing easier, giving the acquirer a competitive advantage.
The difference between mergers and acquisitions
As we mentioned, a merger is a type of acquisition. But these transactions are not exactly the same. There are some key differences between the two.
The structure of a merger is very different from the structure of an acquisition. In a merger, two companies come together as one, forming a new entity. However, in an acquisition, one company purchases the other.
The nature of a merger means companies will combine assets, liabilities, operations, and ownership. The new company that rises from this transaction might have a new name, brand, or identity as the original companies cease to exist.
The structure of a merger aims to achieve a sense of balance and equality, with two companies sharing control of the new business entity. The governing body of this new company will be created through negotiations and agreements between the merging parties, usually with representatives from both companies.
On the other hand, acquisitions are less balanced. Once a company acquires another business, there is no effort to keep both companies as part of the new entity. The buyer takes control of the acquired company, which may or may not be absorbed into the acquiring company’s existing operations.
The structure of an acquisition is characterised by a power shift. Management teams and the board of directors of the buyer assume control of every decision, and stakeholders are not expected to still have stocks of the new company.
The legal status is different in mergers and acquisitions.
In a merger, the companies involved in the transaction cease to exist as independent entities and form a new legal entity. Therefore, this new company has its own legal identity, rights, and obligations.
In an acquisition, there are two different legal statuses: one for the acquired company and one for the acquiring company. The acquired company can retain its legal status as a separate entity unless it is completely absorbed by the buyer. The acquiring company can also maintain its own legal status, gaining control over the acquired company.
Since, in an acquisition, both companies can still exist, the acquired company becomes a subsidiary or a part of the acquiring company’s corporate structure.
The legal status of companies involved in mergers and acquisitions can have a series of implications for the business. It changes contractual agreements, intellectual property rights, regulatory compliance, and ongoing legal obligations. It is crucial for companies to seek experts to navigate this legal process, especially if it involves international laws and regulations.
We have covered the different purposes of an acquisition, and mergers will have different goals and objectives.
Since the legal purpose of a merger is to combine two or more companies into a single entity, the motivations are usually the desire to create synergies, pool resources, and achieve objectives collectively. By merging, companies aim to enhance their market position, increase competitiveness, grow, or access new technologies. Together, companies can reach their aspirations more easily.
The purpose of an acquisition is primarily focused on what the buying company desires. It is not a matter of joining forces but gaining control over the acquired company.
Control is a key difference between a merger and an acquisition. In a merger, control is shared between the two merging companies. As mentioned earlier, the goal of a merger is to create a sense of equality in which decisions are made collectively in the new entity.
Companies that are involved in mergers will discuss and negotiate the new governance structure, management composition, and board representation. As a result, members of both companies will have a voice in the strategic direction of the new entity.
In an acquisition, the acquiring company typically takes control over the acquired company. In this case, only one company will have the authority to make decisions. The management team and board of directors of the acquiring company assume control over operations and strategic decisions. Shareholders also hold the majority of the ownership rights and voting power of the new company, which means they influence the direction of the acquired company.
The transfer of control in mergers and acquisitions is a critical aspect of these business transactions. It requires careful consideration, negotiation and the help of experts to ensure a smooth transition.
The financial impact of mergers and acquisitions differs based on how the transaction is structured. In a merger, the companies involved share the financial impact, combining assets, liabilities, and financial resources. The financial impact is reflected in the valuation and exchange of shares between the merging companies’ shareholders.
In an acquisition, the financial impact is borne by the acquiring company, which incurs the cost of purchasing the target company. In this case, the financial impact includes the purchase price, any assumed liabilities, transaction costs, and potential expenses related to integrating the acquired company. The acquiring company’s financial statements and performance are directly influenced by the buyer’s financials.
Financial advisors, accountants, and other professionals play a vital role in evaluating the financial impact and providing guidance in mergers and acquisitions.
For a merger to take place, shareholders of both merging companies must consent to the creation of a new business entity. They typically vote on the process, which requires a specific majority or supermajority to be successful.
Regulatory bodies, such as competition authorities or industry-specific regulators, also may need to approve the merger to ensure compliance with antitrust regulations, protect market competition, or address potential monopoly concerns.
In an acquisition, shareholders must also agree with the buyout. The target company’s shareholders vote on whether to accept the acquisition offer, and the approval process depends on applicable corporate laws or the company’s bylaws. The acquiring company’s shareholders may also need to approve the acquisition if it involves issuing new shares or diluting shareholdings.
Similar to mergers, regulatory approvals may also be required in acquisitions, especially if it raises concerns related to market concentration, competition, or regulations.
Branding and identity
The way companies handle their brands and identities after a merger or acquisition is very different. In a merger, a new brand or corporate identity is created for the new entity. The company may have a different name and logo to combine both businesses involved in the merger.
In an acquisition, however, the acquired company may retain its original brand and identity, operate as a subsidiary, or be integrated into the acquiring company’s existing operations. Brands will rarely be combined to give the impression of a unified business.
Mergers and acquisitions can both have significant impacts on employees. However, the extent of the impact will depend on specific circumstances and integration plans.
In a merger, the impact can be relatively balanced, as both companies will deal with the consequences of the transaction. The new business entity will have to restructure operations, eliminate duplicate positions, or even create new roles to promote people.
It can be difficult to integrate all employees into a new company culture, but these challenges are shared. In a merger, communication is essential to handle employees.
In an acquisition, the impact on employees can be more pronounced and extreme, particularly for employees of the acquired company. If an acquisition means one of the companies will cease to exist, there might be layoffs.
Mergers and acquisitions carry different levels of risk. Both transactions will face risks associated with integration. It can be challenging to combine operations, which will lead to disruptions and inefficiencies. The market might also respond poorly to two or more companies becoming one.
In acquisitions, however, there is an added financial risk. The purchase price, debt assumption, or potential hidden liabilities can significantly affect the financial health of a company.
Poorly managed mergers and acquisitions can present serious problems to the companies involved. These transactions require comprehensive due diligence, careful planning, and effective execution to reduce the risks associated with the process.
The tax treatment in mergers and acquisitions can vary based on the structure of the transaction.
In a merger, the tax treatment depends on the type of transaction and the jurisdiction’s tax regulations. It is important to consider the transfer of assets and liabilities, taxable events and other implications.
In an acquisition, tax considerations can include purchase price allocation, tax consequences, and tax attributes.
It can be complex to deal with tax treatment in mergers and acquisitions. Therefore, companies involved in these transactions must always seek professional advice and expertise.
Mergers and acquisitions offer opportunities for companies to grow, expand, and create value. Although they bear some similarities, these transactions have many differences.
Understanding the distinction between mergers and acquisitions helps companies and professionals navigate their complexities more effectively, mitigating risks and making better-informed decisions.
Successful mergers require careful planning. Acquisitions also demand thorough due diligence, financial analysis, and a focus on seamless integration. The challenges involved in combining two companies are much smaller when the businesses involved are guided and supported by experts in navigating the intricacies of these transformative transactions.
With thorough preparation, strategic decision-making, and a focus on integration and employee management, companies can go through a merger or an acquisition prepared for long-term success.