What is the Difference Between a Merger and Acquisition?

What is the difference between a merger and an acquisition? The two concepts are intimately linked. Essentially, a merger is where two or more companies combine to create a larger joint organization with a bigger market share. An acquisition is where one company takes over another company.

Famous examples of mergers include Disney’s merger with 20th Century Fox in 2019, a $71.3 billion deal. It granted Disney a 35% market share of the movie box office. Famous acquisitions include the acquisition of Android by Google in 2005. While at the time, Android was relatively unknown, the move allowed Google to better compete with Microsoft in the smartphone industry.

Let’s go into these differences in more detail.

• The Difference Between Mergers and Acquisitions
• What Does an M&A Process Provide?
• M&A Purchasing Considerations

The Differences Between Mergers and Acquisitions

While the two practices are linked and share some similarities, they are separate entities. For businesses considering overseas expansion, both are very valid methods of opening up new markets that once remained inaccessible. In most cases, both mergers and acquisitions provide access to bigger market shares, bigger infrastructure, diversification of both assets and services and access to new supply and distribution chains.

A key method when distinguishing between the two is to determine whether the deal made was friendly (merger) or hostile (acquisition). 

Mergers

Mergers require two or more companies to be consolidated into a new organization. Think back to 1998 when Exxon and Mobil merged to become ExxonMobil. The deal was worth $73.7 billion and allowed the newly-formed organization to become not only the largest oil company, but the third-largest company in the world at the time. 

This comes with new ownership, new management and a dilution of the individual power of each company. Also, when a deal like this happens, the stock of each individual company is surrendered and transferred to the ownership of the new business. 

Mergers are usually done between companies that entertain the same size, scope and market interest. However, it’s rarer for a merger to be completed than an acquisition, as it’s less likely that two companies will be in the right position to merge and come to a definite agreement on how to share their assets. 

Acquisitions

Acquisitions differ in that a new company does not emerge from the deal. Rather, the company being acquired ceases to exist, with its assets now being owned by the acquiring entity. You might have heard of them being called ‘hostile takeovers’ or simple ‘takeovers’, but this doesn’t imply they’re malicious - it’s usually just a case of one larger company seeing an opportunity for growth by the consolidation of the other. 

In contrast to mergers, acquisitions require a large amount of buying power, but this also means that the acquiring party has the final decision on the fate of the company being bought. So while it can be more expensive, it’s a potentially simpler process as the parties don’t have to come to any sort of compromise about how the new entity is formed. 

In many cases, an acquisition is done to purchase the technologies of the acquired company, which might save the purchasing company years and years of investment costs, research and development in the pursuit of a similar technology. 

What Does an M&A Process Provide?

The motivations behind a merger or an acquisition are never singular. For example, a company who wants to pursue either of these may find themselves looking for:

• Increased diversification.
• Better tax efficiency.
• Bigger market share.
• Greater revenue.

Similarly, these processes can also offer a distinct avenue into another market that may reside overseas. Both mergers and acquisitions provide the necessary infrastructure and supply and distribution chains already set up in foreign markets in order to allow a new business to quickly make an impact in that market. 

M&A Purchasing Considerations

Both mergers and acquisitions can be funded in a variety of different ways. For example, either process can be funded through:

• Purchasing or exchanging stock.
• Cash.
• Equity.
• Debt (known as a leveraged buyout).

Alternatively, a mixture can be used. In some cases, shareholders that own common stock have voting rights and can, potentially, vote on whether or not a merger or acquisition actually takes place. However, in the case of an acquisition, some shareholders’ voting rights will not have enough power to stop the acquisition from occurring. 

If you’re interested in learning more about mergers and acquisitions, alongside their pitfalls and how a business can go about evading these unfortunate circumstances, download our guide. 

Mergers and Acquisitions: The Common Pitfalls and How To Evade Them

Mergers and acquisitions are as potentially beneficial as they are risky. When it comes to expansion through this route, the right preparation has to be undertaken. We’re here to help you get started.

In our guide, you’ll find the introductory information you need to consider when planning your next steps of business growth. Maybe a merger or acquisition is the right step for you - if so, you’ll need this guide. You don’t want any relevant information to pass you by.

Just click the link below to get started.