What is the Difference Between a Merger and an Acquisition
Feb 3, 2023
It is rightly said that "the most successful mergers and acquisitions are the ones where both parties are willing to work together and make the necessary changes to create value."
The concept of mergers and acquisitions (M&A) is not new. The roots can be found in the late 19th and early 20th century when big businesses started to expand and consolidate their operations by acquiring smaller ones.
Some believe that "Mergers and acquisitions are like marriages- very exciting, but the fact is that 50% of them end in divorce."
Companies like Standard Oil and U.S. Steel bought numerous smaller businesses in the late 19th century to expand their market share and obtain economies of scale.
The Sherman Antitrust Act, which sought to outlaw monopolies and safeguards competition, was adopted in the United States at the beginning of the 20th century. Due to this, some of the biggest syndicates, such as Standard Oil, were broken up, and smaller, more aggressive businesses emerged.
Following World War II, M&A activity expanded as businesses sought to grow their operations and capitalize on emerging markets and technologies. As a result, large-scale M&A transactions peaked in the 1960s and 1970s, especially in the consumer goods, defense, and aerospace sectors.
A surge of LBOs, in which companies were acquired using a lot of debt, helped M&A activity reach unparalleled heights in the 1980s. In addition, hostile takeovers also became more prevalent during this time.
Companies have used M&A activity to expand, diversify, and restructure their businesses in recent years. As a result, it has remained a significant part of the global business landscape.
In addition, technology and globalization have accelerated the growth of M&A activity, making it a usual tactic businesses use to achieve their objectives.
Note: The history of M&A has been characterized by times of competition, innovation, and consolidation, reflecting the ongoing transformation of the business world.
Time and again, several methods have been introduced to help build a merger model to simulate the impact of two companies merging or one company taking over the other. A range of M&A model assumptions, model analysis, and model outputs follows the input of these models.
A merger is the coming together of two or more businesses into one. This can happen in several ways, including an equal, friendly, or hostile takeover.
A merger usually results in forming of a new company, with the merging companies ceasing to be independent legal entities. Increasing market share, gaining access to new markets or technology, or achieving economies of scale are all common reasons for mergers.
Several kinds of mergers are
- Horizontal merger: This kind of merger occurs when two businesses that are directly competitive with one another come together. Increasing market share and reducing competition are frequently the objectives.
- Vertical merger: This kind of merger happens when a business buys a client or a supplier. Gaining more control over the supply chain or access to new markets are frequent objectives.
- Conglomerate merger: This kind of merger happens when two businesses from several industries come together. Increasing corporate diversity and lowering risk are frequent objectives.
- Reverse merger: In this kind of merger, a private company joins forces with a publicly traded organization to become publicly traded without going through the IPO procedure.
- Friendly merger: It is one that all sides have agreed to, frequently intending to form a more effective and successful business.
- Hostile takeover: This type of merger is not approved by the target company. Hence the acquiring corporation must employ force to take over the target business.
Many M&A tools and software, including Excel training, are available for M&A teams. The right tool depends on your team’s specific needs and business worth.
A company buying another company is the process of an acquisition. When a firm buys another, it takes control of the target company, which then becomes a subsidiary of the buying company.
Note: Depending on the acquisition terms, the management and operations of the target firm may be kept or changed.
Like mergers, acquisitions may be amicable or adversarial. In what is known as a "minority acquisition," the purchasing business may also purchase a sizable portion of the target company's stock without controlling it.
Typically, the major objective of an acquisition is to grow market share and drive out competition or to acquire access to new markets, technologies, or resources. Cash, shares, or a mix of the two can be used to finance acquisitions.
Several types of acquisition are
- Asset acquisition: A corporation only purchases the assets of another company. Instead of buying the whole business, the acquiring corporation may buy individual assets, such as a product line or a plant.
- Stock acquisition: The target company is taken over by the company that has purchased its stock. The term "stock swap" is another name for this kind of acquisition.
- Merger: This acquisition involves binding two businesses to create a new one, with the merging businesses ceasing to exist as independent legal organizations.
- Leveraged buyout (LBO): For this purchase, a sizable amount of debt is used as funding, with the acquiring business utilizing the target company's assets as security for the loan.
- Management buyout (MBO): An acquisition in which a firm's management team buys the business from its current owners. Private equity firms are frequently used in this kind of transaction.
- Minority acquisition: It occurs when a firm buys a large portion of another company's stock but an insufficient number to take control of the target company.
- Strategic acquisition: It is made by a corporation when it buys another business to acquire access to new markets, technologies, or resources. Increasing market share and removing competitors are its major objectives.
Difference between merger and acquisition
Generally, a merger is the coming together of two or more firms into one entity. In contrast, an acquisition is the process of one company buying another company.
Both strive to accomplish strategic objectives, including growing the market share, accessing new technology and resources, or obtaining economies of scale. The main difference between the two, though, is how these are carried out and viewed by the target companies.
The table below will help you learn more about the differences between the two. These are
M&A can be seen as a component of corporate strategy, where businesses seek to expand, diversify, or restructure their operations by buying or merging with other businesses.
Similar objectives, like boosting market share, getting access to new technology and resources, or obtaining economies of scale, can be accomplished through M&A.
While an acquisition involves one firm buying another, a merger involves two businesses coming together to establish a new entity.
The combination of two significant airlines, Company A and Company B, is one example of a merger. In this instance, the two businesses merge to create a new airline, ending the previous businesses' existence as independent businesses.
The combined assets, network, and market share of the two original enterprises would be available to the new airline.
Another instance of a merger is when two businesses in the same sector, such as Company E and Company F, decide to combine to create a single business. They can want to expand market share, lessen competition, and realize economies of scale.
Note: Although M&A have different legal and financial characteristics and produce different results, they are closely related since they are both employed to accomplish the same aims.
When Company C, a major retail chain, buys Company D, a little specialty shop, that is an example of an acquisition. In this scenario, Company C gains ownership of Company D, and the specialty shop joins the retail chain as a subsidiary.
Company D's management and activities may be kept or changed depending on the acquisition's terms. Obtaining access to new markets, technologies, or resources that Company D possesses may be the aim of the acquisition of Company C.
When Company G, a business in a completely unrelated field, like technology, buys Company H, a business focusing on branding and marketing. Company G may seek to acquire new marketing and branding methods to improve its products and services.
- Pfizer and Warner-Lambert's merger in 2000: World's largest pharmaceutical companies.
- Marriott International and Starwood Hotels & Resorts Worldwide's merger in 2016: World's largest hotel company.
- Sprint and T-Mobile's merger in 2020: Stronger player in the US wireless market.
- Exxon and Mobil's merger in 1999: World's largest oil and gas company.
- The acquisition of Motorola by Google in 2012.
- The acquisition of Instagram by Facebook in 2012.
- The acquisition of LinkedIn by Microsoft in 2016.
- The acquisition of Nestle's U.S. confectionery business by Ferrero in 2018.
1. What distinguishes an acquisition from a merger in the most fundamental way?
The primary distinction between M&A is that a merger involves joining two businesses to create a new entity, whereas an acquisition involves purchasing a different business.
2. What are the benefits to shareholders of the companies engaged in a merger or acquisition?
When two businesses merge, both shareholders receive stock in the new company. In addition, shareholders of the acquired company receive money or shares in the acquiring company as part of an acquisition.
3. In a merger or acquisition, who controls?
A merger often involves equal input from both companies into the management and direction of the new entity. In contrast, an acquisition involves total control of the acquired company by the acquiring company.
4. Are transactions involving mergers and acquisitions taxable?
Acquisitions are generally regarded as taxable transactions, but mergers are generally considered tax-free transactions. While acquisitions are structured as cash or stock-for-stock transactions, mergers are typically structured as a stock-for-stock deal.