What is the difference between mergers vs acquisitions? Both mergers and acquisitions are two of the most common corporate restructuring strategies, and are often mentioned in the same breath. However, mergers and acquisitions are two entirely different things. After all, merger means “to combine” whilst acquisition means “to acquire”. Continue reading below to understand the differences between mergers and acquisitions.
What is a Merger?
A merger is an agreement to unite two or more existing organizations to become one new entity. In a merger, there is a consolidation of two or more companies to form an entirely new entity that has a new name. There can be various reasons why a company wants to unite with another company. Usually, the primary reasons are to expand the company’s market, to access new segments, or to gain more market share.
There are five types of merger, which include horizontal merger, vertical merger, product extension merger, market extension merger, and conglomerate merger. Compared to acquisitions, mergers are not as common, but there are several notable examples of merger. The first example is the merger between Disney and Pixar. The merger between Disney and Pixar has led to incredibly successful movies, such as Tangled and Frozen. The second example is the merger between Exxon and Mobil, which resulted in the formation of ExxonMobil, now the strongest leader in the international oil market.
What is an Acquisition?
In contrast, an acquisition is an action when a company buys another company and takes control over the purchased company. Hence, an acquisition is sometimes called a takeover.The payment method for an acquisition can be either in cash or by acquiring the company’s stocks.The buying company does so by purchasing most of the other company’s shares (over 51% of the share capital) and becoming the majority shareholder.
As a result of an acquisition, the buying company receives the assets and stocks of the purchased company. The buying company will be able to make and implement decisions freely on the purchased company. The buying company becomes more influential than the purchased company in terms of structure, operation, and size.
There three types of acquisition, which are hostile acquisition, friendly acquisition, and buyout. Notable examples of acquisition are the acquisition of Whatsapp by Facebook in 2014 and the acquisition of Yahoo by Verizon which was completed in 2017. In these cases, the buying companies (Facebook and Verizon) “swallow” the purchased companies (Whatsapp and Yahoo) and are able to make and implement decisions on the purchased companies. Facebook has opted to keep Whatsapp as a separate entity, whereas Verizon has opted to combine Yahoo with AOL in a new division called Oath.
Nature of Decision and Purpose
The first big difference between mergers vs acquisitions is the nature of the decision and purpose. A merger is a mutual decision of the participating companies, so you can say that a merger is friendly by nature. In a merger, all of the participating companies have more-or-less equal positions. Their managements will have to release some authority to make room for each other. As for the purpose, a merger is meant to decrease the competition and to increase the operational efficiency.
On the other hand, an acquisition may be either friendly or hostile by nature, depending on the decisions of the buying and purchased companies. A friendly acquisition happens when the management of the target company and the board of directors agree to the acquisition, and they have full knowledge and consent over the process. However, if the management and board disagree, a hostile acquisition may take place.A hostile acquisition happens when the acquirer goes directly to the target company’s shareholders or when the acquirer tries to replace the management of the target company in order to get the acquisition approved. A hostile acquisition may also happen by purchasing a majority interest on the open market.
The purpose of an acquisition is usually for an instantaneous growth, as the buying company or the acquirer will be able to have great control over the purchased company. The acquirer will be able to access the target company’s products, services, and market segments.
The Companies Involved
The next difference between mergers vs acquisitions is regarding the involved companies. In a merger, there are at least three involved companies: the two participating companies that aim to unite and the newly formed company as the result of the merger. A merger always results in the formation of a new company. The managements of the participating companies usually will have more-or-less equal rights and positions in the new company. Usually, the size of the participating companies in a merger is similar.
On the other hand, an acquisition does not cause the formation of a new company. So, the minimum number of involved companies is just two. The acquirer “swallows” the target company, but the acquirer will be able to choose what to do with the purchased company. The acquirer has complete control and power over the target company. They can keep it as a separate entity or change it into a special division. The size of the acquiring company will be larger than the size of the target company.
The last difference between mergers vs acquisitions is regarding the legalities. A merger often requires more legal formalities. This is partially because the process results in the formation of a new company. The process can be quite time consuming. In addition, a merger also leads to the issuing of new stocks for the new company.
On the other hand, an acquisition requires quite fewer formalities. The process can be accomplished much more quickly. It does not need to issue new stocks.
|- The fusion of two or more companies to create a new company||- The purchase of a company (the target company) by another (the acquirer)|
|- Comes from a mutual decision of all the participating companies||- May be either friendly or hostile|
|- The participating companies are considered equals||- The acquirer has more control and power than the target company|
|- Always results in the formation of a new company||- Does not create a new company|
|- Requires more legal formalities||- Requires fewer legal formalities|
Although mergers and acquisitions both result in the “uniting” of the participating companies, they are very different. In a merger, the companies unite to create a new company. The participating companies are treated as equals, and the decision is created from a mutual agreement. A merger requires more legal formalities and results in the issuing of new stocks. On the other hand, in an acquisition, one company buys the other and takes complete control over the target company. The nature of the decision may be either friendly or hostile. It does not create a new company, so it does not need to issue new stocks. It requires fewer legal formalities.