Definition
A merger occurs when two companies combine to form a new entity, often for the purpose of pooling resources or enhancing business operations. An acquisition, on the other hand, is when one company buys the majority of another company’s shares to take control of it. While both involve the joining of two businesses, the main difference is the method and level of control resulting from the transaction.
Key Takeaways
- Mergers and acquisitions are strategic decisions taken by organizations for business growth. A merger refers to the process where two or more companies combine to form a new entity, while an acquisition occurs when one company fully buys another and clearly establishes itself as the new owner.
- In a merger, the companies involved are typically of the same size and stature, and they agree to move forward as a single new company. In contrast, acquisitions often involve a larger company purchasing a smaller one which is then absorbed, ceasing to exist as an independent entity.
- The primary goal behind both mergers and acquisitions is to combine resources, decrease competition, increase market share, or gain access to new markets or technologies. However, the process, negotiations, and outcomes can vary significantly, with a merge usually being more collaborative and an acquisition potentially being either friendly or hostile.
Importance
Mergers and Acquisitions (M&A) are vital finance terms that denote different ways businesses can combine to achieve their strategic and financial objectives.
A merger generally refers to two firms of approximately the same size joining hands to move forward as a single new entity, simultaneously sharing ownership.
On the other hand, an acquisition is the purchase of one company by another, the larger company absorbing the business of the smaller company.
Distinct processes and consequences result from M&A transactions, including potential changes in control, new business models, and possible impacts on market competition.
Therefore, understanding M&As’ implications is crucial for company leaders, investors, regulators, and the success and sustainability of business landscape in general.
Explanation
Mergers and acquisitions (M&A) are finance strategies used primarily for the purpose of expanding a company’s reach, increasing profitability, improving customer service, or infiltrating new markets. A merger refers to the process where two formerly independent companies voluntarily combine to form a new entity.
This could be driven by various motives, such as achieving economies of scale, diversifying the product range, or accessing a wider client base. It can enhance the competitive positioning of the companies by consolidating their strengths and resources.
An acquisition, on the other hand, involves one company purchasing a majority ownership in another company’s stocks, gaining control over its operations, policies, and management. Acquisitions can serve as an efficient growth strategy when a company wants to enter a new market segment, obtain unique technologies or resources, or eliminate competition.
Although acquisitions may sometimes be perceived negatively due to the element of corporate takeovers, they can also offer benefits like improved business capabilities and performance metrics. In both mergers and acquisitions, the ultimate aim is generally to maximize shareholder value over time.
Examples of Mergers vs Acquisitions
Merger- Exxon and Mobil: In 1999, two of the largest oil companies in the world — Exxon and Mobil — merged to create ExxonMobil. This is widely considered as one of the largest mergers in history. The merger was done to increase profit margins by reducing operating costs and to combine resources and expertise for better efficiency and wider market reach.
Acquisition- Disney and Pixar: In 2006, Disney acquired Pixar Animation Studios for approximately $
4 billion, which created a major shift in the animated movie industry. This is an example of acquisition, where the buyer (Disney) had control over the operations and resources of the target company (Pixar). The purpose of the acquisition was to improve Disney’s animation segment, as Pixar had an impressive track record in the field.
Another example of acquisition is Facebook’s purchase of WhatsApp in 2014 for an impressive sum of $19 billion. Facebook, the acquiring company, sought to broaden its product portfolio and leverage Whatsapp’s extensive user base for increased profitability and market dominance. Despite the acquisition, WhatsApp continues to operate as a separate app, showing that acquisitions do not necessarily mean the end of the acquired company’s brand or product.
FAQ: Mergers vs Acquisitions
What is a Merger?
A merger happens when two firms, often about the same size, agree to move forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.”
What is an Acquisition?
In an acquisition, one company takes over another and becomes the new owner. The acquired firm does not change its legal name or structure but is now owned by the parent company.
What are the key differences between a Merger and an Acquisition?
The key difference between a merger and an acquisition lies in the way the deal is communicated to and viewed by the target company’s board of directors, employees, and shareholders. A merger is considered to be a strategic decision of combining two equally sized companies, while an acquisition is often viewed as one company consuming another.
What are the benefits of a Merger?
Mergers typically come with several benefits like improved operations, larger market presence, diversification, and increased profitability. They also allow businesses to achieve corporate growth faster and more efficiently.
What are the benefits of an Acquisition?
Acquisitions can offer several advantages such as more resources and market share, increase in plant capacity, new sales channels, diversification, and decrease or elimination of competition.
Related Entrepreneurship Terms
- Due Diligence: The comprehensive appraisal of a business or its assets undertaken by a potential buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
- Synergy: The increased efficiency and resulting potential financial benefit achieved through the combining of companies.
- Hostile Takeover: A type of acquisition that is carried out against the wishes of the board (and usually management) of the target company.
- Fair Market Value: The price that a company would sell for in an open market.
- Integration: The process of combining systems, operations, and cultures of two companies during a merger or acquisition.
Sources for More Information
- Investopedia – A comprehensive resource for definitions, explanations, and examples of financial terms and concepts.
- Forbes – A globally recognized media company, focusing on business, investing, technology, entrepreneurship, leadership, and lifestyle.
- Financial Times – An international daily newspaper printed in broadsheet format and published digitally that focuses on business and economic current affairs.
- Harvard Business Review – Provides professionals around the world with rigorous insights and best practices to lead themselves and their organizations more effectively.
