Mergers and acquisitions both pertain to the joining of two or more business organizations that involve a restructuring of their corporate order. They aim to improve their teamwork with the organization to raise their competence and efficiency. However, there are significant differences between a merger and an acquisition in the matter of procedure, initiation, and outcome.
Overview of Merger
When two or more separate businesses consolidate to build a new enterprise, it is known as a merger. The merged entity generally adopts a new name, management, and ownership that consists of employees from both companies. The decision to merge is forever mutual since the merging companies join their forces to seek specific benefits, even at the expense of diluting their powers. There is typically no exchange of cash.
The motive for mergers may be to enlarge market share, access new markets, lower operating costs, raise revenues, and expand profit margins. The parties to the contract are usually similar in size and scale of operations, and they consider each other as equals. A merged company publishes new shares, and the shares are disseminated proportionately among available shareholders of both parent companies.
The British multinational entity GlaxoSmithKline was formed by the merger of two pharmaceutical firms, SmithKline Beecham and Glaxo Wellcome, in 2000.
Overview of Acquisition
An acquisition involves one organization acquiring the business of another. The acquirer must buy at least 51% of the target company’s stock in order to obtain complete control over it. It generally happens between two companies that are not identical in stature: a financially stronger entity usually acquires a smaller, comparatively weaker one. The decision doesn’t have to be a mutual one; when a company assumes the operations of another without the latter’s consent, it is considered a hostile takeover.
The smaller company continues its activities under the name of the bigger one. The acquirer can elect to either keep or lay off the employees of the acquired company. In reality, the acquired company continues to exist in its earlier name and functions under the name of the acquiring company; except in a few cases, the acquired company get to keep its original name. No new shares are published.
The motives for acquisition are identical to those of mergers. The primary aim is to obtain an enhanced competitive benefit by joining resources with another entity.
In 2017, e-commerce giant Amazon acquired the American supermarket outlet Whole Foods Inc. for $13.7 billion. The latter still runs in its original name and is operated by the original CEOs, Walter Robb and John Mackey; nonetheless, its entire operations run under the parent company, Amazon.
Significant Differences between Merger and Acquisition
The terms merger and acquisition primarily refer to the consolidation of two or more business organisations to achieve improved Teamings. The motives for partaking in either contract comprise expanding operations, obtaining a higher market share, decreasing costs, or boosting profits. Nevertheless, there are several significant differences between the two, as summarized in the specific table:
| Aspect | Merger | Acquisition |
| Procedure | Two or more separate companies combine to form a new business entity. | One company wholly undertakes the operations of another. |
| Name of Company | The merged entity runs under a new name. | The acquired company mainly runs under the name of the parent company. In some instances, nonetheless, the former can keep its original name if the parent company permits it. |
| Power | There is a dilution of power between the engaged companies. | The acquiring company exercises complete power over the acquired one. |
| Mutual Decision | A merger is acknowledged by mutual consent of the concerned parties. | The decision of acquisition may not be mutual; if the acquiring company undertakes another enterprise without the latter’s permission, it is regarded as a hostile takeover. |
| Comparative Stature | The parties engaged in a merger are of identical size, nature, and scale of operations. | The acquiring firm is bigger and financially stronger than the target company. |
| Shares | The merged company publishes new shares. | New shares are not published. |
Primary Differences Between Mergers and Acquisitions
Mergers and acquisitions are hot business terminology used by people sometimes interchangeably, though they both refer to the combination of two firms. It is important to note that there are serious differences between the two. A merger occurs when two separate companies merge to form a new entity. An acquisition results when one firm acquires another firm by purchasing it. Below are some distinctions between mergers and acquisitions:
1. Process Framework
Mergers and acquisitions can work in different ways. Usually, mergers are friendlier, and money doesn’t change hands. But when one company buys another in an acquisition, money is almost always involved. As the purchased company ceases to exist following the acquisition, the acquiring company gains from the acquisition. The acquiring company may also develop the company through stock purchase, or by obtaining the company’s debt.
2. Performance of Stocks
A merger and acquisition impacts stocks and shareholders separately. A merger may affect stock prices in the days leading up to the merger, based on the companies involved and present macroeconomic conditions. After the merger happens, shareholders may witness positive outcomes and dividends over the long term. Based on the size of the companies engaged in the merger, shareholders may also witness alterations in their voting powers. The company may also provide new stocks in the new company’s name. During an acquisition, the buying company gains control of the entire stock of the acquired company.
3. Formation of Resultant Entity
Although both acquisitions and mergers lead to companies joining together and connecting their resources, there are some significant differences in the resulting entity. In a merger, both companies bring their finest aspects and resources to form the merged company. This company obtains a new name, though companies may also prefer to keep their names. With an acquisition, the acquired business ceases to exist. This implies that the acquiring business stays, with the identical name, and utilises the resources and assets from the company it acquired.
4. Consent and Approvals
In a merger, both parties agree to join, building a more amicable process as the companies ponder the terms of the merger. This can be separated into an acquisition. In a congenial acquisition, the smaller company has made itself present for sale and is agreeing to be purchased. In a hostile buyout, the smaller company refuses to be acquired. A big company may acquire it by influencing shareholders to have management acquiesce to an acquisition, or by purchasing over 50% of the smaller company’s stock to obtain power.
5. Power Dynamics
There is a distinct balance of power between an acquisition and a merger. In a merger, both parties gain from joining, resulting in an equal exchange of power and resources. In an acquisition, the acquiring company typically owns all the power. The company acquiring also gets extra benefits like greater stock, shareholders, capital, new clients, and superior market reach.
6. Accruing Benefits
In a merger, both companies gain from combining their resources to boost profit and market share. Mergers are usually mutually agreeable. In an acquisition, the buying company benefits, as it obtains access to the company’s resources, capital, market share, and brand. The acquired company does not gain any advantages as it no longer exists following the acquisition.
7. Size and Scale
In a merger, the companies combining are usually of the same size. They are also typically within the same segment. For instance, two companies that both provide tutoring services may wish to merge to combine their tutors into one company while expanding their service area, leading to higher profits. In an acquisition, one company is more likely to be bigger than the other. This implies that the acquiring company is generally bigger, with more capital and resources, upon acquiring the company.
Conclusion
A merger and acquisition is a highly effective business strategy through which a firm expands by diversification, growth, and changing market conditions. The priority in a merger inclines to be more on coordination or the share of resources, whereas an acquisition means strategic advantage or control. Both approaches carry merits, like market expansion, technology acquisition, economies of scale, and lowering of competition. Comprehending the finer distinctions and reasons for wanting the strategies will assist in making well-informed business decisions and thus attaining permanent success. A merger and acquisition would rest on the nature of the market dynamics, the company’s goals, and the intended impact on its growth and operations.
