Difference Between Mergers and Acquisitions: Merger and acquisition are two terms commonly used interchangeably in the business world. These words carry different meanings and implications for the companies involved. Both strategies can expand the reach of a company, help to raise market share, or provide any company with a real advantage over its competitors, but in totally different ways. It is very important to draw the difference between mergers and acquisitions to make the right decisions in the ever-changing business environment.
What is a Merger?
A merger is the integration of two or more companies into a single entity. It is a mutually beneficial agreement where both parties agree to join their assets, resources, and market positions. A merger is an effort to establish a stronger company so that it will be able to compete more aggressively in the market. The companies that merge are usually of equal size and influence on the market, and they merge for efficiency, cost-cutting, and improving overall profitability.
In a merger, Disney and Pixar joined forces in 2006, representing a popular example. The latter two firms were among the strongest in the animation business, and after their combination, they successfully utilized the strengths of one another to deliver new content with a larger influence in the film industry.
Meaning of Acquisition
An acquisition is the act by which one company acquires another company and assumes control of its operations, assets, and decision-making; unlike a merger, it usually implies that the acquiring company is larger in scale than the company being acquired. Acquisitions may also either be friendly or hostile, depending on the approach or the willingness of the target company to be acquired.
The most popular example is Facebook, which bought the now-famous Instagram in 2012. Therefore, Facebook spent almost a billion dollars to acquire Instagram to further have an edge on the social media front and reach the younger generation through the medium more often for photo-sharing activities.
Key Differences Between Merger and Acquisition
Understanding the key differences between mergers and acquisitions clarifies different impacts on businesses, market strategies, and changes in organizations. Let us dig deeper below –
1. Definition and Process
Merger: This process involves the combination of two or more companies into a new firm. Two companies enter the deal voluntarily. Resources of both the firms are merged and mostly an exchange of shares is done.
Acquisition: One company buys another company and assumes control over the operations and management. The acquiring company hardly forms a new entity; it assimilates the acquired company into its existing structure.
2. Purpose and Objective
Merger: The principal objective of a merger is to achieve synergies, minimize cost, and achieve economies of scale. The merging companies attempt to increase their market share and penetrate new markets in an effective manner.
Acquisition: Acquiring an entity is often done with the notion of achieving a strategic advantage—for example, diversifying products or services or destroying competition. It typically involves purchasing value-generating assets, such as technology or intellectual property, that the acquiring company lacks in-house.
3. Control and Ownership
Merger: In the case of a merger, control and ownership are divided among the shareholders of the company to be merged. Under a shared management system, the decisions are shared by them from this newly formed entity.
Acquisition: In acquisition, control of the assets and operations of the target company is taken by the acquiring company. Ownership rights are given to the shareholders of the acquiring company.
4. Size of Companies Involved
Mergers: Generally, mergers happen between two firms of the same size and market capitalization. This is due to the balance of power, which ensured that the two firms were appropriately contributing to the new firm.
Acquisitions: This usually happens as a large corporation buys a smaller one. In terms of size, this is great; the large corporation uses its resources to absorb the smaller one.
5. Legal and Financial Structure
Merger: The legal procedure of a merger is very complex. In this, the financial assets are restructured from both sides to create a new entity. Its stocks, assets, and liabilities also need to be studied.
Acquisition: The financial structure of an acquisition is relatively simple. Normally, one would buy stock or assets from the target company, thereby resulting in a direct financial transaction.
Difference Between Merger & Acquisition – Quick Highlights
Let us do a quick recap of the differences between Mergers and Acquisitions in the table given below –
AspectMergerAcquisitionDefinitionCombination of two companies to form a new entity.One company purchases and takes control of another company.ObjectiveCreate synergies, reduce costs, and enhance market strength.Gain a strategic advantage, expand market reach, or acquire assets.Control and OwnershipShared control and ownership among the merged entities.Complete control by the acquiring company over the target.Size of CompaniesUsually involves companies of similar size and influence.Often involves a larger company acquiring a smaller one.Legal StructureIt requires forming a new entity with a restructured organization.Involves direct ownership transfer of assets or stocks.Management StructureJoint management shared decision-making between both companies.Acquiring a company typically dominates decision-making processes.Market PerceptionSeen as a mutual partnership between equals.Viewed as a takeover, either friendly or hostile.Company IdentityBoth companies lose their original identities to form a new one.The acquired company often operates under the acquiring company's name.Duration of ProcessGenerally a longer process due to negotiations and agreements.Relatively quicker, especially in the case of hostile takeovers.ExampleVodafone and Idea merger.Microsoft’s acquisition of LinkedIn.
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Reasons for Mergers and Acquisitions
Mergers and acquisitions are business strategies that help organizations achieve one or several objectives leading toward growth, increased market share, or operational efficiency. The following are some of the reasons companies engage in mergers and acquisitions:
1. Market Expansion
Reason: Companies may choose to merge or acquire another organization to expand their market penetration or increase their presence in existing markets.
Example: Acquisition would enable a company to enter the market of another region or country, hence not having to begin from scratch.
2. Economies of Scale
Reason: Mergers can be applied in order to have cost savings by using the same resources, increasing production capacity, and operation efficiency.
Example: One can merge two manufacturing centres that, in turn, reduce the cost of manufacturing production and efficient logistics, as well as improve the supply chains.
3. Diversification
Reason: Companies acquire or merge to diversify their product lines, services, or market segments to reduce the element of risk.
Example: When one software company buys another, and the very intention is to expand the portfolio. It is not to have dependence on the same product over and over again.
4. Acquisition of New Technology or Expertise
Reason: Acquiring better technology or intellectual property or specialized know-how is yet another common motivation for acquisition.
Example: a large company can amplify its technological power by acquiring a startup company that has developed innovative AI technology.
5. Market Share
Reason: Mergers and acquisitions allow companies to enhance their market share because the reduced competition makes it easy for the companies to strengthen their positions in the industry.
Example: The resultant entity after the merger between two competitors will have a larger percentage of the market.
6. Development of Synergy
Reason: Synergistic creation aims to allow more efficient use of resources and capabilities through utilization of complementary sets of resource and capability.
Example: A manufacturing firm can acquire a firms in distribution to increase the efficiency of the supply chain.
7. Tax Benefits
Reason: Some firms merge or buy other firms to utilize tax advantages such as spreading the losses of the acquired firm.
Example: A profitable firm can merge with a loss-incurring business to decrease its taxable income and increase cash inflow.
8. Strategic Reorientation
Reason: Firms can enter mergers and acquisitions as a form of business review and market direction.
Example: A consumer goods company can purchase the health and wellness product brand for it will be by high consumer demand of healthy products.
9. Elimination of Competition
Reason: Acquisition will remove the existing competitors from the market, and hence the acquiring company can control the prices and thus improve profitability.
Example: Merging of the major corporation with a smaller competitor decreases competition, and hence easy dominance in the market.
10. Brand Value Improves
Reason: This may bring in excellent brand value and goodwill to both companies and hence customers get improved.
Example: When an innovation-led new company is taken over by a known brand, then it will be reflected in the reputation of both the brands and their combined offerings.
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Actual Examples of Mergers and Acquisitions
Vodafone and Idea Merger vs. Microsoft Acquisition of LinkedIn
The companies merged in 2018 to form Vodafone Idea.
The two largest operators of the country, Vodafone India and Idea Cellular, merged to become Vodafone Idea Limited, the largest telecom operator in the country. The motive to merge came from the challenge and competition with other telecom giants, such as Reliance Jio, whose market is gaining tremendously. The aim was to consolidate both firms' infrastructural and the spectrum to present better services. Generally, this merger operated on shared ownership, where both companies were to have an equal say in the decision-making processes of the merged entity.
Microsoft Acquisition of LinkedIn (2016)
On the other side of the coin, Microsoft purchased LinkedIn for around $26.2 billion in 2016. This acquisition was to make Microsoft even bigger in professional social networking and assimilate LinkedIn's data into its suites of services. Microsoft became the fully owned company for LinkedIn and, thus, had full control over its operations, management, and strategic directions.
Conclusion
A merger and acquisition is a very effective business strategy by which a firm expands through growth, diversification, and alteration of market conditions. The emphasis in a merger tends to be more on coordination, and by that, I mean the share of resources, whereas an acquisition implies control or strategic advantage. Both approaches have merits, such as market expansion, economies of scale, technology acquisition, and reduction of competition. Knowing the finer differences and reasons for desiring the strategies will help in making well-informed business decisions and thus realizing long-term success. A merger and acquisition would depend on the company's goals, the nature of the market dynamics, and the effect meant to be achieved on its operations and growth.
Difference Between Merger and Acquisition FAQs
1. What are the distinctions between a merger and an acquisition?
A merger is when two companies combine into a new entity, and an acquisition is when one company buys another.
2. Why do companies engage in mergers and acquisitions?
Companies conduct mergers and acquisitions for broader market reach, to reduce costs, obtain technological expertise, achieve product diversification, and eliminate competition.
3. How do mergers help an organization?
Mergers benefit a company by achieving lower costs, synergy creation, increased market share, and access to new markets.
4. Do mergers have to be mutually agreed upon?
Mergers are generally mutual agreements between the two firms concerned, unlike acquisitions, which might sometimes be hostile.
5. Can you give me some examples of famous mergers and acquisitions?
For example, Vodafone merged with Idea and Microsoft acquired LinkedIn.
