You’ll often hear the terms merger and acquisition used interchangeably, so it’s easy to assume they relate to the same action. Especially as both actions involve two companies combining in some way. But they are different and they both describe a specific type of business interaction.
In short, an acquisition is when one company buys another, whereas a merger is when two companies join together. Of course, it’s actually somewhat more complicated than this. So in this article, we’ll look more in-depth at the difference between a merger and an acquisition. We’ll also cover other types of takeovers and what they mean.
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Acquisitions
Think of an acquisition as a transaction. It’s when one company buys another company, or at least the majority stake of its business. Unlike a merger, this doesn’t need to be a mutual decision and often happens when one larger, financially stronger firm buys a smaller company. You might say it “acquires” it.
The acquiring firm keeps its name, whereas the one that’s been bought usually begins operating under the name of the larger company. In a few cases, both companies keep their names and structures.
The main negotiation in an acquisition is the price for which the larger company buys the smaller one. The seller will, of course, try to get as much money from the sale as possible. It’s always worth seeking help from a professional financial consultant who can assist with buy-side due diligence. In other words, make sure what the seller is saying is accurate.
Acquisitions are more common than mergers, as you’re less likely to find two companies of a similar size that consent to merging together. However, acquisitions are often seen as a more hostile move due to the imbalance of power, so sometimes they’re labelled as a merger to reduce any negative views around the move.
Mergers
A merger is when two (or more) firms combine together to form one new company that operates under the same banner. They’re usually firms of around the same size who see a mutual financial benefit in joining forces.
The CEOs both have to agree to the move, unlike with an acquisition. This leads to a change of structure and management involving a blend of people from both sides.
They often combine elements of their old names and logos to create a new one. An example of this is when Daimler Benz and Chrysler merged together to form DaimlerChrysler. They both took elements of their names and logos to create a new company. This new venture was then managed as one entity by a mixture of staff from both sides.
Mergers tend to focus more on the companies’ stocks and shares rather than cash. Seeing as the original organisations dissolve after the merger, new shares and stocks are issued proportionally amongst the merged company. The division is generally the biggest negotiation element of a merger.
The Benefits of Acquisitions
There are some serious perks to acquisitions. Most of these apply to the buyer, but the seller also benefits in their own way:
- Companies can expand their product offerings
- Fewer running costs on both sides
- A quick way for the buyer to inherit assets that would take a long time to develop otherwise
- Less need for external suppliers
- Stocks remain unchanged
The Downsides of Acquisitions
Of course, it’s not all rosy. There are some drawbacks to being part of an acquisition:
- Sometimes seen as hostile, particularly if the smaller company doesn’t want to be bought and doesn’t agree to the terms
- A complex and time-consuming process
- Expensive, particularly with regards to legal fees
- The selling company loses its rights to make decisions and often loses its identity
- More chance for disruption as planning can’t be as carefully mapped out
The Benefits of Mergers
With mergers, both organisations have agreed to the move because it’s in the interest of all those involved. Here are some of the main ways they stand to benefit:
- Easier to share information and resources
- Larger portion of the market share
- Fewer running costs on both sides
- A quick way to reach new markets they would otherwise struggle with
- Larger profit margins
- Directors and employees are kept in the loop, keeping it on good terms
- Power balance feels equal
- Well planned, reducing the chance of upset and confusion during the merger
The Downsides of Mergers
While mergers are generally friendly and beneficial to all parties, there are still a few drawbacks:
- Some mergers are actually acquisitions that are (incorrectly) labelled to reduce any negative connotations
- Rare to find two companies of similar size who want to merge together
- A little messy arranging the new shares and stocks
- A lengthy and expensive process, especially as there are lots of legal hoops to jump through to form a new organisation.
Other Types of Takeover
There are a few other terms it’s worth getting familiar with. While they all involve organisations joining together in some way, there are distinct differences between each manoeuvre.
Hostile Takeovers
Hostile takeovers are classed as acquisitions. But why are these not the same? In this instance, the acquiring company doesn’t need approval from the board of directors. Instead, they can go straight to the shareholders and try to obtain controlling interest that way. It often leads to bad blood, which is why it’s referred to as a hostile takeover.
Acquisition of Assets
While similar, an acquisition of assets is different from a straightforward acquisition. It’s more commonly seen when one company goes bankrupt and another buys its assets (with shareholders’ approval). The company selling its assets is then liquidated when the final assets are transferred.
Management Acquisition
Different again is a management acquisition. The executives of an organisation company buy the controlling stake of it. For a publicly listed company, this move makes it private.
In Summary
To conclude, mergers and acquisitions both involve two or more companies joining together. A merger is a mutual decision with an equal balance of power. On the flip side, an acquisition involves one company buying another, and not always on good terms.
So the next time you hear the phrase “mergers and acquisitions” or “M&A”, you’ll know exactly what the lingo means.
