In the business world, mergers and acquisitions are two of the most confusing and misunderstood words. The two words are often used in place of one another although they are quite different in meaning.
The two words, merger and acquisition are used in reference to the joining or connection of two companies. We often hear these words in business news but not many people understand the main difference between them. The people who are actually interested in business or management and choose it as their career path they know well the actual difference between them. Both these words refer to the combining of two companies, but they are to be used in different scenarios.
Merger vs Acquisition
The main difference between merger and acquisition is that a merger is a case when two different entities, businesses, or companies get together to create a new joint company, whereas acquisition is the takeover of one company by the other.
Comparison Table Between Merger and Acquisition (in Tabular Form)
| Parameter of Comparison | Merger | Acquisition |
|---|---|---|
| Definition | A merger is a situation where two or more companies combine to form a new company. | An acquisition is a situation where one company takes over the other company. |
| Power | The powers remain the same for both the merging companies. | The ultimate powers lie in the hand of the acquiring company. |
| Name | In the situation of a merger, a new name is given to the company. | In the situation of acquisition, the name of the acquiring company’s name can be used. |
| Legal formalities | In mergers, there are more legal formalities as compared to acquisition. | In acquisition, there are fewer legal formalities as compared to a merger. |
| Level | In a merger, two or more companies that consider each other to be of the same level come together to form a new company. | In acquisition, the company which is acquiring the other company is considered larger and on a higher level. |
What is Merger?
A merger refers to the process in which two or more different companies, businesses, or entities, come together to form a new company or work on a common goal. A new ownership and management structure is formed. The strategies they use are for better approaches to work towards a common desired goal.
Mergers are basically done to work towards a common desired result, decrease operational costs, increase profits, and become larger in markets. Usually, mergers are voluntary or friendly and it includes businesses that are mostly of the same size and level.
Advantages of merger:
- Mergers help to reduce the operational costs of companies.
- It helps two or more companies to work towards a common objective.
- It helps to expand market share. When two or more companies merge and form a single new company, this new company obtains a larger market share.
- In case the businesses are not earning profits, mergers help to prevent shutting down of such businesses.
- Mergers help to decrease weaknesses and gain a competitive advantage in the market.
- When Companies merge, they share skills, knowledge, resources, and technology which helps to improve the overall growth of the merged companies.
Types of mergers:
- Horizontal
- Vertical
- Reverse
- Conglomerate
- Congeneric
Legal formalities:
In the case of mergers, the companies have to mention all the essential details in writing and they also have to submit several documents such as the latest yearly reports, sales and purchase agreements, and all necessary documents related to the merger decision. The governing merger laws differ from place to place and country to country.
What is Acquisition?
An acquisition refers to the situation in which one company takes over the other. The company which is taking over obtains more than 50 percent of shares for the acquisition to take place. Mostly, acquisitions do not happen on a friendly basis.
In the case of acquisition, the company taking over gets complete control over the other company. They are free to take any decisions such as decisions regarding resources, structures, staffing, and so on. For the acquired company and its employees, it creates uneasy and insecure feelings.
Advantages of acquisition:
- It reduces the costs of operation.
- Acquisition reduces the amount of taxes.
- It helps to defeat market entry barriers that the company was previously facing.
- Acquisition helps to increase the market shares of the company.
- In an acquisition, the acquiring companies get access to larger capital.
- When two companies come together, they obtain different specialists such as human resource specialists, or financial specialists.
Main Differences Between Merger and Acquisition
- A merger is the joining of two or more companies or businesses to form a new company whereas an acquisition refers to the takeover of one entity by another.
- In mergers, there are more governing laws and formalities as compared to acquisition.
- During the merger of two or more companies, a new name is given to the company. On the other hand, during acquisition, mostly the name of the acquiring company is used.
- In the situation of merger, the strength and power remain the same for both the merging companies. In the situation of acquisition, the acquiring company gets the final strength and powers.
- A merger happens when two or more companies at the same level come together and join to form a new company. In acquisition, the company which is taking over the other company is regarded as larger and on a higher level.
- A merger is a friendly action and it is generally a mutual decision of both the merging companies, whereas acquisition may be either voluntary or involuntary and may be unfriendly.
Conclusion
When two or more companies are wanting to expand their business they might consider going through the process of merger or acquisition.
Companies consider mergers or acquisitions in order to increase market shares, work together towards a common goal, or to get access to larger capital. These processes are beneficial as they are cost-effective, and work faster to achieve a common desired goal.
Thus, we can say mergers and acquisitions take place for different reasons and they are two different processes but are often confused to be the same.
References
- https://journals.sagepub.com/doi/abs/10.1177/0021886305281902
- https://www.nber.org/papers/w18346.pdf