What is the Difference Between Mergers and Acquisitions

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  • 24 Oct 2023
What is the Difference Between Mergers and Acquisitions

Mergers and acquisitions (M&A) are indeed two popular corporate restructuring techniques firms use to boost corporate value and maximise profit. It is not unusual to see both names used interchangeably in the corporate sector. Mergers and acquisitions, however, are not the same thing. In truth, there are several ways in which mergers and acquisitions (M&A) differ. We examine these terms more closely to help you comprehend the difference between mergers and acquisitions. However, let’s start with the meaning of mergers and acquisitions.

Key Highlights

  • A merger occurs when two or more separate firms combine to establish a new company.
  • A merger or acquisition involves one company buying the assets of another.
  • Both mergers and acquisitions strive to improve internal synergies within the company in order to boost competence and productivity.

A merger occurs when at least two businesses come together to form a new company. In most cases, the combined company organisation adopts a new name, ownership or possession, and management. It may also include employees from the two firms. The consolidating companies combine their abilities to seek out specific benefits. This is done even at the risk of weakening or diluting their unique commercial powers. So, the decision to merge is always shared or mutual.

The aim of consolidations or mergers is to grow their market share, enter new markets, lower operational costs, boost revenue, and raise profit margins. The commercial entities that are parties to the agreement or contract often compare one another on the basis of size and scope of operations. They view one another as being on an equal footing. A combined company issues new shares, which are distributed proportionately to the current shareholders of both parent companies.

An acquisition is a process through which one organisation or corporate entity gains or acquires another company. The acquirer must purchase at least 51% of its equity to gain control over the other firm. It typically occurs between two organisations of different sizes. A more financially stable entity buys a smaller and comparatively more vulnerable commercial firm. When a company takes over the operations of another without the approval of the acquiring company, it is referred to as a hostile takeover.

Under the name of the larger organisation, the smaller one carries on with its operations. The acquirer can keep or dismiss the employees of the purchased or obtained company. In fact, the acquired organisation ceases to exist under its previous name and operates under that of the secured organisation. Only in a very small number of instances does the gained or acquired organisation retain its original identity. Moreover, no additional shares are provided. The primary goal of acquisition is to add the resources of another organisation to get a greater competitive edge in the market.

The following are some key differences between an acquisition and a merger on the basis of different parameters.

Benefiting Party

The fact that various parties might profit from each type of transaction is perhaps the most apparent distinction between mergers and acquisitions. Here is how each may be advantageous to the parties:

Merger: In a merger, both organisations can continue to operate and use their combined resources to enhance the general operating procedures of the new organisation.

Acquisition: In acquisitions, the firm acting as the buyer might gain access to new shareholders, new consumers, new inventory, additional cash, and a wider market. This indicates that the purchasing firm will probably gain more than the acquired company. An acquired firm either goes out of business or continues to operate under the acquiring company's name.

Resulting entity

While both mergers and acquisitions entail pooling the resources of two businesses, the end outcome might vary depending on the transaction.

Mergers: Most mergers result in a new company that incorporates the greatest features of the two original businesses. Some firms may merge the names of the two former companies to use for the new one, particularly if either company is a familyowned enterprise.

Acquisitions: When a business buys another, it makes an acquisition. As a result, the acquiring firm often keeps its own identity while having the option to incorporate some aspects of the acquired company.

Issuing of new shares

There is another significant distinction between mergers and acquisitions. It is in relation to the issuance of additional shares for investors. Here is how it goes.

Merger: Following a merger, the resulting new company often issues new shares to enable new shareholders to own a stake in the operational firm rather than one of the prior corporations.

Acquisition: A corporation typically doesn't issue any additional shares following an acquisition. This is because the acquiring company stays the same, and the acquired company no longer exists. The option to purchase shares in the acquiring firm is available to shareholders.

Decision-Making power

The degree of decision-making authority each firm has over the business move is a further distinction between acquisitions and mergers.

Merger: When two businesses combine, it signifies their mutual willingness to work together. This indicates that each has almost equal decision-making authority.

Acquisition: While agreements between the two firms are frequently required for acquisitions, it is conceivable for one company to acquire another without the other's express assent. A hostile takeover is another name for this kind of transaction.

Let’s now take a look at the following table that lists the major differences between mergers and acquisitions.

Parameter Merger Acquisition
ProcedureTo create a new business entity, two or more businesses merge with one another.One business takes over all the operations of the other.
Name of CompanyThe merged entity has a different name.Most of the time, the acquired firm uses the parent corporation's name. However, in rare circumstances, the parent firm may let the former keep its original name.
Company SizeIn a merger, the parties are of comparable size and financial positionThe target firm is smaller and less financially stable than the purchasing corporation.
Share PowerThere is no gap in power between the two firms involved.The acquiring business completely controls the acquired business.
SharesThe merged company issues new shares.New shares are not issued.

Now that you know the merger and acquisition differences, let's take a quick look at why firms opt for them. Any of the following factors may be the reason for a merger or acquisition.

  1. To enter a new market or category of products.

  2. For entering the market with a recognised brand.

  3. Gaining market share

  4. For eliminating competition from the market.

  5. To lower tax obligations

  6. Develop or acquire expertise in a business.

  7. To offset the losses of one company with the help of profits of another.

Companies pursue mergers and acquisitions for a variety of reasons. Acquisitions and mergers are necessary for businesses to move forward.

Conclusion

A merger is combining the businesses of two companies. However, acquisition refers to the buying of one firm by another. Mergers take place with mutual consent. Acquisitions are also mostly mutually beneficial. However, some acquisitions can be hostile. Firms decide these things based on their circumstances and the talks that follow with other firms.

A merged entity usually takes a new name and issues new shares to existing investors. However, acquisition eliminates the existence of one firm and doesn’t often issue new shares. So, both mergers and acquisitions have their strengths and limitations. Therefore, it is vital for businesses to thoroughly assess the situation they are in and make the strategic choice that best fits their needs and circumstances.

FAQs on Acquisition and Merger

No, there is a clear difference between an acquisition and a merger. Mergers and acquisitions are distinct processes with different outcomes. While acquisitions entail one firm acquiring control of another, mergers involve the establishment of a new corporation.

Companies merge to increase their market share, get access to new markets or technology, improve competitiveness, and expand their client base.

Yes, there are some risks to mergers and acquisitions. Operational difficulties, legal obstacles, financial risks, and possible job losses are some of the major ones.

Yes, in most cases, regulatory approval is required for mergers and acquisitions. The Competition Commission of India (CCI) overlooks them. The extent of regulatory approval required will mostly depend on the scope, severity, and antitrust laws.

Cutting down on the workforce, organisational restructuring, and changes in work culture are the most common effects of mergers and acquisitions on employees. They may, however, also offer chances for growth and new responsibilities.

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