What’s The Difference Between A Merger And An Acquisition?

Mergers and acquisitions are two common corporate restructuring strategies, and you will often hear the terms used interchangeably or abbreviated to M&A. However, mergers and acquisitions are not one and the same. In fact, the differences between mergers and acquisitions are quite distinct.

Mergers and acquisitions (M&A) have long been popular as part of business strategy and planning for companies to grow, alter the nature of their business and/or make themselves more competitive in the market. 

What Are Acquisitions?

An acquisition, also known as a takeover, involves the purchase of one company or business by another business entity or company. Sometimes the two companies are merged into one, or other times the companies keep their separate identities, and ostensibly, operate as separate entities. Often the parent company will be the larger business and have complete control over the smaller company once the acquisition is complete, even if the two companies are going to continue to operate separately. 

There are typically two types of acquisitions - hostile and friendly. Friendly acquisitions are when the company being acquired is willingly selling to the parent company. Again, usually a larger company purchasing a small firm that has made itself available for sale, or was open to the proposition of a sale. This type of acquisition is always preferable, it avoids a lot of potential conflict, negative public relations and operational issues. 

Hostile takeover is a term many people are familiar with when hearing about acquisitions. This is when the acquisition or purchase is not desired or wanted. The term “hostile takeover” is used because the purchase may be involuntary and the company being purchased usually isn’t interested in giving up its independence. Hostile takeovers often get started when the company being purchased has declined a sale offer. This opens the door for the acquiring company to pursue multiple options for a hostile takeover. The most common way a hostile takeover goes down is a company acquiring a significant ownership stake in the company to be acquired. This allows pressure to be applied on other shareholders or owners to vote in favor of the acquisition. If that doesn’t work there is always the option of purchasing a controlling interest in the target company, forcing out existing management and installing new management who will authorize the sale. 

What Are Mergers? 

Unlike an acquisition, a merger is when two or more existing companies agree to come together and form an entirely new company. Mergers are friendly, unanimously agreed to by the parties or companies involved and can be a smoother transition than a takeover or acquisition. 

There are several reasons a company or companies would be interested in a merger:

• Increased revenue
• Business growth 
• Cost reduction 
• Increased competitiveness 
• Exposure to new markets 

There are several options for a merger depending on the needs of the businesses. Here are some of the most common types of mergers:

• Conglomerate - a merger between two or more companies that have unrelated business activities. They may operate in different industries, regions or territories. A pure merger of this type involves two companies that have nothing in common. A mixed merger of this type involves businesses that are trying to gain market share or product extensions through the merger.  
• Congeneric - also known as a Product Extension merger. It’s combining two or more companies that operate in the same industry or market and have overlapping capabilities - production, marketing, research and development, etc. The merger allows for complementary products or services to be offered under the same company. A new product, or service, line from one company is added to the existing product, or service, line of another company, forming a new business. 
• Market Extension - this is a merger between two companies that sell the same product but are in different markets. The goal is to gain access to a bigger market and more clients. 
• Horizontal -when two companies operating in the same industry merge. Usually, a consolidation between two or more companies that are competitors offering the same services or products. 
• Vertical - when two companies that produce parts or services for a product merge. Usually, it’s two companies that are operating at different levels within the same industry supply chain coming together to combine operations. 

Key Differences Between Mergers and Acquisitions

In a merger two or more companies come together to form a new company; in an acquisition a company, typically the financially stronger one, takes over another company where there wasn’t mutual agreement.

A merger is usually a strategic decision between two companies that are generally on the same page about making the deal, careful discussion and planning are involved and it’s less contentious; an acquisition is strategic as well, but usually only for one of the companies since the decision may not be mutual and there more a chance for hostility and disorder.

Merged companies are usually considered by each other to be on equal footing and looking at ways to make this beneficial for everyone, take advantage of synergies to increase market share, revenue, product, services or another benefit; in an acquisition the more powerful company may be imposing its will on the acquired company, resulting the management turnover, loss of freedom of decision making and operational control, there may be a large power dynamic in play with acquisitions.

Mergers result in a new company being formed and all the legal formalities and procedures associated with setting that up; an acquisition isn’t as likely to have as many formalities and paperwork since there probably won’t be a new entity coming out of it. 

How To Carry Out a Successful M&A

• Pick the right target or targets, the merger or acquisition needs to be strategic for your business. The bottom line is you’re looking to create more value and opportunities. Don’t be afraid to walk away if you realize that the deal doesn’t fit what you’re looking for, assuming you're the acquiring company in the acquisition scenario. 
• Make sure you’re paying the right price and understand how the value of the other business was determined. Just because it’s going to be beneficial (hopefully) to you in the long run doesn’t mean you should overpay for a company. Be sure to scrutinize the numbers and don’t move forward on a price that doesn't work for you. 
• Pay attention to how you’re going to integrate the businesses. Are you going to continue operating the target company as its own independent company, with a fair amount of autonomy? Where can you gain economies of scale, cut overhead and increase efficiency? Map all of this out in advance, you don’t want to merge or acquire a company and then get caught having to wing it in terms of operations. 

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