Mergers vs Acquisitions: Key Similarities and Differences

Mergers and acquisitions are often misunderstood terms in business. While both refer to joining two companies, they have key differences.

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A merger happens when two companies merge to form a new organization. In contrast, an acquisition involves one company taking over another. Businesses pursue mergers and acquisitions to expand their reach, increase market share, and create shareholder value.

What is a Merger and Acquisition?

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Mergers 

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From a legal perspective, “A merger involves two companies coming together to form a new entity, complete with a new ownership and management structure that typically includes members from both firms.”

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A common way to distinguish between deals is by whether they are friendly, as in a merger, or hostile, as in an acquisition. Mergers do not require cash to finalize, but they reduce each company's power.

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In reality, friendly mergers between equals are quite rare. It is unusual for two companies to find it beneficial to join forces, especially when both CEOs agree to give up some control to achieve those benefits. When such a merger occurs, both companies' stocks are exchanged, and new shares are issued under the name of the newly formed business.

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Mergers are usually carried out to lower operational costs, enter new markets, and increase revenue and profits. They are generally voluntary and involve companies that are similar in size and scope.

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Acquisitions 

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In an acquisition, “A new company is not created. Instead, the smaller company is usually absorbed and no longer exists, while its assets become part of the larger company.”

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Acquisitions, often called takeovers, usually have a more negative connotation than mergers. Companies that acquire others might call it a merger, even though it is a takeover.

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An acquisition occurs when one company takes control of all operational management decisions of another company. While acquisitions involve significant cash, the buyer has complete power.

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Companies may acquire another company to buy their supplier and improve economies of scale, which reduces costs per unit as production rises. They might seek to increase their market share, lower expenses, and expand into new product lines.

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Acquisitions can also help companies:

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• Gain access to the technologies of the target company.
• Save time and money on capital investments, research and development.

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Since mergers are rare and takeovers often have a negative perception, the terms have become mixed and are frequently used together. Today, corporate changes are called merger and acquisition (M&A) transactions instead of just mergers or acquisitions. 

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Why Merge instead of Acquire?

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A merger happens when both parties agree to it willingly. In contrast, an acquisition may not always be mutual; if the acquiring company takes over another business without its approval, it is a hostile takeover.

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Key Differences between Mergers and Acquisitions

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Control & Governance

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Mergers usually lead to a more balanced sharing of control between the companies involved, while acquisitions often result in the acquiring company having more control over the acquired business. This is why acquisitions can be seen more negatively compared to mergers.

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Legal Structure

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As the name implies, mergers and acquisitions have different legal frameworks. A merger combines two legal entities into a new, single entity. In contrast, an acquired company can maintain its legal identity even after being officially taken over by another organization.

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Culture and Integration

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Mergers usually require companies to combine their organizational cultures into a new identity. Successful mergers promote cultural compatibility, with both parties committed to integrating their employees.

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In contrast, the acquiring company's culture typically takes precedence during an acquisition. The acquiring company usually works to integrate the acquired company into its existing culture, values, and norms. This can involve changes to policies, procedures, and management practices to maintain consistency throughout the organization.

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Employee Impact

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Both mergers and acquisitions can cause employee concerns, who may worry about how the changes and new leadership will affect their jobs. However, mergers are generally seen more positively because they promote a more collaborative atmosphere.

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In contrast, acquisitions are more likely to result in changes to employee roles and responsibilities and may even lead to the elimination of overlapping positions.

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Financial Implications

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In mergers, companies often use stock swaps, exchanging shares instead of cash. This method can offer advantages like delaying taxes. While cash payments are also an option, they usually require significant capital or debt financing, which might not be feasible during the transaction.

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In acquisitions, the buying company usually purchases the shares or assets of the target company directly. Alternatively, they can buy specific company assets, which can be a simpler and less expensive approach.

Key Similarities between Mergers and Acquisitions

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Change in Ownership

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Both mergers and acquisitions typically involve a change in ownership. In a merger, there is often a subtle shift in the organization, including leadership from both companies. In contrast, during an acquisition, the acquired company usually comes under the ownership and leadership of the acquiring company.

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Regulatory Oversight

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Both mergers and acquisitions often need approval from antitrust authorities or regulatory bodies to comply with laws and regulations. The requirements depend on various factors, such as the companies' industry, locations, and size.

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Synergy Potential

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Whether a company is part of a merger or acquisition, joining resources, skills, or market positions can significantly benefit both organizations. Combined strengths, like one company's advanced technology and another's strong client relationships, can improve the competitive advantage of the newly formed entity.

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Integration Challenges

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Integrating operations, systems, and cultures presents several challenges for organizations involved in mergers and acquisitions. Effective integration is essential for achieving the benefits that drive these deals. For this reason, many companies hire experts to help guide the process for both employees and leaders.

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Strategic Intent

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Although their approaches differ, mergers and acquisitions seek to grow businesses, increase market presence, and achieve specific competitive advantages. Most companies involved in M&A activities, whether through mergers or acquisitions, have these common goals.

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Read more on: A Complete Guide to Post-Merger Integration

How can ioSENTRIX Help?

Both mergers and acquisitions combine two companies, but different tax and practical considerations can affect the decision on which route to take. Due to the complexities of these strategic transactions, it is wise to consult an expert, like ioSENTRIX, who can help with merging, acquiring, or being acquired to meet business goals.

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Whichever option is chosen, business leaders need to plan thoroughly and prepare their employees for the impact these changes will have on their roles and the company culture.

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For more details, reach out to our experts today!

FAQs

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Are mergers better than acquisitions?

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Mergers are often seen as a more cooperative way for companies to combine. This is because both companies agree to the merger and benefit from it. On the other hand, acquisitions are sometimes seen as less friendly. This is because one company takes over another, and the company being acquired is being absorbed by the other.

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What are the three types of mergers?

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There are five main types of business combinations, often called mergers. These are conglomerate mergers, where companies in different industries combine; horizontal mergers, where companies in the same industry combine; market extension mergers, where companies that sell the same products in other markets combine; vertical mergers, where companies at different stages of production in the same industry combine; and product extension mergers, where companies that sell related products combine.

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Who gets paid in a merger?

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In a merger, the shareholders of the company that is being acquired usually receive cash, shares of the company that continues to operate, or a mix of both money and shares.

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Is merger good or bad?

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A merger between companies can eliminate competition, often reducing the cost of advertising and selling their products. Furthermore, a merger can improve how a company uses its finances and makes plans for its future.

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Who controls mergers?

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The FTC and the DOJ review mergers. When a merger needs a closer look, it's assigned to one agency. The decision is based on which agency has the most knowledge about the specific industry.

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