With the pace of growth of businesses today, companies are faced with strategic choices that will determine the future of growth and survival. Among the most common techniques employed to promote faster growth and higher leverage is merger and acquisition. It is critical in the business world, yet largely misconceived. In the article below, we discuss differences and contrasts in acquisitions and mergers, such as definitions, procedures, advantages, and disadvantages involved. The article will be of use to firms like Start An Idea that may be considering making such a move to expand operations or expand market share.
1. What Is a Merger?
A merger is the unification of two separate firms into a new single joint firm. "Merger" is used to refer to the union of two firms, usually of equal size and market capitalization, into one firm. The firms merging usually pledge to combine strength, assets, and market size with the aim of creating a value greater than individually what they can come up with.
In an ordinary merger, the two businesses are wound up and a new company is formed with a new structure and shape but a new name. Mergers typically take place in a friendly manner, and the two businesses consent to manage the new company jointly. Mergers are generally viewed as a partnership in which the two firms believe that through merging they will have more synergies, less cost of doing business, or more innovation.
Key Features of Mergers:
- Common ownership: The two companies usually have common ownership in operating the new company.
- New company: A new company is created from the union of the old companies.
- Creation of synergy: Companies merge for reasons of improving their competitive strength, lowering their costs, or expanding into new markets.
- Joint ownership: The two companies usually have joint ownership of the merged business.
2. What Is an Acquisition?
An acquisition, on the other hand, is when a firm purchases another firm by buying stocks or assets. The acquiring company buys the target business and incorporates it as a subsidiary of the company. Acquisitions do not form a new entity but integrate the operations and assets of the target firm into the acquiring firm.
In acquisition, decision-making and control remain with the acquiring firm and the acquired firm becomes non-autonomous. Acquisitions either happen in a friendly way or hostile manner with no approval taken from the target company in the event of a hostile takeover. Both are agreeable with consent and negotiation to be carried out for ownership transfer to occur in the event of friendly acquisitions.
Key Features of Acquisitions
- Takeover: The acquiring company owns the target company.
- No new organization: The acquiring company purchases the operations and assets of the target company.
- Control: The acquired company is owned by the acquiring company.
- Potential hostility: Takeovers are either friendly or hostile, with the latter being when the target company does not consent voluntarily. The former is when the target company agrees voluntarily.
3. Chief Differences Between Mergers and Acquisitions
Mergers and acquisitions have forms that are monumental in differences, and understanding the differences is crucial to any company that would like to pursue one of them. Below, we summarize some of the most prominent distinguishing features:
3.1 Structure and Ownership
- Mergers: Two companies coming together to create a brand new, merged entity. The two firm proprietors own and control the new entity in common.
- Acquisitions: When a company buys another company. The acquiring company is the dominant company and usually retains the majority of ownership and control, and the acquired company ceases to be an independent company.
3.2 Decision-Making Process
- Mergers: Mergers are typically two-way deals. Both companies negotiate and make joint decisions together regarding the future of the combined company. Joint decision-making generally involves merging leadership teams and business strategies.
- Acquisitions: In acquisitions, the acquiring company would typically make decisions on their own. The target company may have a say, but the acquirer would determine and dictate the terms and conditions of the deal.
3.3 Company Culture Impact
- Mergers: When two companies are merging, both companies have to adapt to a new company culture. Cultural integration is also difficult because the two companies can have different workplace traditions, values, and working procedures.
- Acquisitions: The culture of the acquiring company dominates in acquisitions because the target firm is merged into the acquiring company's existing business. In a friendly takeover, however, there may be an attempt to merge the target firm's culture.
3.4 Legal and Financial Structure
- Mergers: A merger forms a new firm, and this entails a significant amount of legal reorganization. Mergers are generally handled as a transaction under which the two firms effectively relinquish their status as independent firms.
- Acquisitions: Acquisitions are not a new firm, however. The acquirer integrates the target company's assets, liabilities, and operations into its existing structure. The deal can be achieved through stock purchase, asset purchase, or merger, depending on the nature of the deal.
3.5 Size and Market Power
- Mergers: Companies of the same size and market strength will tend to enter mergers and merge in order to build strength for leverage in competition.
- Acquisitions: Acquisitions are normally where a big company buys a small company, and reverse acquisitions are where a small company buys a big company. The acquiring firm has generally developed the financial muscle and market muscle to do so.
3.6 Risk and Control
- Mergers: The risk of the merger is shared equally by both companies as both are committing resources, know-how, and funds. The control is also shared equally by both parties.
- Acquisitions: The acquiring company discloses the greatest risk to acquisition as it acquires full control and liability of the target company's assets and liabilities and its business.
4. Mergers and Acquisitions- Advantages and Disadvantages
Both mergers and acquisitions are extremely profitable and involve some level of risk. Now let us analyze the likely advantages and disadvantages of both processes.
4.1 Mergers
- Synergies: Combined resources and capabilities can result in operating effectiveness, cost savings, and improved innovation.
- Market Extension: Mergers allow firms to penetrate new product markets or lines by leveraging comparative strengths in one another.
- Risk Sharing: Risk is being transferred from one firm to another, which is stabilizing.
4.2 Disadvantages of Mergers:
The two different company cultures tend to merge in a difficult process and can lead to unrest or demotivation of employees.
- Complexity: The legal and financial complexity of forming a new firm is costly and time-consuming.
- Uncertainty: Generally, there is doubt about the long-term performance of the combined firm.
4.3 Advantages of Acquisitions
- Control and Dominance: Acquisition by the buyer of complete control over the target business allows decision-making and running of the business.
- Market Share: Acquisitions enable firms to acquire market share, enter new markets, or acquire valuable intellectual property rapidly.
- Cost Savings: Acquisition of a business with pre-existing assets, customer base, and infrastructure could be cheaper than starting anew.
4.4 Disadvantages in Acquisition:
- Integration Problems: It may be challenging to integrate the target business, particularly if there are some specific special cultures or operations in the target company.
- Financial Cost: Acquisitions are normally followed by considerable amounts of financial outlays, and if the target business is financially unsound, it is financially costly to the acquirer.
- Hostile Takeovers: Hostile takeovers are resisted by the managers and employees of the target firm, thereby destabilizing operations and discrediting the reputation of the firm.
5. When Should a Company Pursue a Merger or Acquisition?
On what basis a company would go for merger or acquisition differs on a multitude of different considerations such as the strategic goals of the company, the market scenario, and the available resources. There are the following situations when each one of them would apply:
Consider a Merger When:
- The two entities are of the same size and strength and want to create a new merged company.
- The goal is to leverage synergies, i.e., cost benefits or creativity.
- There is a more collaborative approach to business development by the two companies.
Use an Acquisition When:
- A firm is significantly larger or financially more powerful and desires to buy a small firm.
- The plan is to obtain market share promptly or apply new acquisitions without the inconvenience of needing to construct from the ground up.
- Gaining control of target company assets, operations, or intellectual property is necessary.
6. Conclusion
Mergers and acquisitions are wonderful growth drivers for businesses with advantages and disadvantages. For Start An Idea-style companies, it's imperative to understand these distinctions in deciding on optimal directions of growth, innovation, and marketplace strategy. Whatever efforts are made at consolidating to build a new, larger unit or acquire and hope to sustain control of key holdings, the need for hard planning, innovative thinking, and extensive due diligence must be employed to build a successful enterprise. Examining the unique nature of each of the strategies, the firms can decide intelligently to lay the foundations for their success in the years to come.
Lastly, mergers and acquisitions can be a source of new opportunities, a driver of competitiveness, and a source of long-term profitability. But optimality is typically a matter of close attention to firm objectives, market fundamentals, and their likely impact on operations and culture in the long run.
Also Read: Types of Mergers and Acquisitions
