Tuesday, February 16, 2016

A Marriage of Equals? The Difference Between Corporate Mergers and Acquisitions

Although both types of restructuring are intended to increase a company's value, profitability, and synergy, the concepts of a merger and acquisition are not interchangeable. The simplest difference is whether the interaction is friendly or hostile. Part of this distinction exists in how it is announced to the public and the target company's employees, shareholders, and board of directors. Friendly purchases are generally called mergers, while hostile ones are almost universally known as acquisitions.

To put it plainly, a merger occurs when two companies consolidate into one new identity, whereas an acquisition involves one company taking over another entirely, establishing itself as the new sole owner. 

What Is a Merger?

Image Courtesy Evan Forester | Flickr
A merger consolidates two companies into a new entity, combining their operations under a new ownership and management structure. Ostensibly, this new management structure includes key members from each firm, building a greater whole from the sum of the two (or more) parts. A merger involves complicated negotiations, rather than one company dictating terms to another. A merger of equals occurs when two CEOs heading companies of approximately the same size decide a marriage between their two companies is in the their best interests. Upon merging, both companies surrender their stocks, issuing new stocks in the name of the newly formed entity. Depending on the relative size of the companies, shareholders of the merged companies often receive new shares at different ratios. The rate of exchange for shares is one of the important details determined by the negotiations. Once the merger is complete, a single new company exists, while the merged companies either cease to exist or become branded sub-entities of the new company.

Why Merge?

Companies may choose to merge for a number of reasons. In a merger, the combined larger entity typically results in increased resources for marketing, finance obligations, or product expansion. Alternatively, the combined entity may merge similar operations to reduce costs, creating a more streamlined company that is smaller than the two independent companies. By downsizing redundant staff and consolidating facilities, the new company often reduces payroll and overhead costs. When the merged companies previously competed directly against each other, they also reduce marketing costs due to the decrease in competition.

What Is an Acquisition?

In an acquisition, one company takes over the operational management decisions of another company. Sometimes called takeovers, acquisitions generally have a more negative connotation than mergers. In some instances, a larger company buys out a smaller one, then compels the purchased company to refer to the acquisition as a merger to avoid negativity. Unlike a merger, the purchased company's stocks are purchased before the sale rather than surrendered afterwards.

Why Acquire?

The strategic reasons for an acquisition mirror those for a merger, such as a decreased market or the desire to reduce competition. Unlike the often expensive and lengthy process of merger negotiation, an acquiring company generally has more freedom to dictate the terms of sale and purchase to the target company in a shorter time-frame. In some instances, companies acquire other entities to acquire rights to a specific product, allowing them to bypass the process of product creation. Similarly, a company may acquire another to gain control over a resource it requires, allowing it to bypass the market. By purchasing another company, a business can increase its size, visibility, and prestige.

Types of Mergers and Acquisitions

There are several kinds of mergers and acquisitions, distinguished primarily by the relationship of the entities involved. In a horizontal merger, the two companies exist within the same business sector. By merging, they increase marketplace visibility, combined value, and cost savings. In a vertical merger, one company buys a supplier or retailer, allowing it to reduce overhead operational costs and to increase its economy of scale. A conglomeration deal involves two businesses whose products or services are unrelated to one another. This allows for diversification of interests and capital investment.


Whether friendly or hostile, horizontal or vertical, or negotiated or purchased, all mergers and acquisitions have one important goal in common: to make the value of the combined companies greater than the sum of the parts combined. Accordingly, a combined company must have more value than either individual company had on paper previous to the restructuring. This is called synergy. Synergy often takes the form of revenue enhancement and cost savings by focusing on staff reduction, economies of scale, improved visibility, greater market reach, and development of new technologies. Success of a venture, whether merger or acquisition, depends on whether this synergy is achieved. Increasingly, the blended Mergers and Acquisitions (or M&A) moniker is used to cover all discussion of mergers and acquisitions, regardless of the nature of the deal in question. The two kinds of corporate marriages, however, remain subtly different, especially to a business in the process of merging and creating a new identity, or being acquired and losing its identity altogether.

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