Mergers and acquisitions are two common strategies undertaken by businesses for reasons such as growth, restructuring, or expansion into other markets. The terms are used interchangeably but refer to two different processes with distinct legal, financial, and operational implications. It is therefore very important, in corporate restructuring activities, to have a proper perception of the difference between the two terms: merger and acquisition. It digs down into what constitutes a fundamental difference between mergers and acquisitions and why those differences matter.
What is a Merger?
Merging refers to the process through which the shareholders of two or more companies agree to merge the companies into one company, the merging companies seek the amalgamation of resources, market shares, or improved operational efficiencies. During a merger, the merging companies cease to exist as legal entities, which are then succeeded by a new unified company. As per law courses, in India, Decisions to merge are usually mutual; therefore, companies agree to join forces for strategic reasons.
Key Characteristics of a Merger
- Mutual Agreement: Two similar-sized firms that are at similar levels normally merge when they agree on a merger.
- New Creation: The creation of a new entity generally occurs in most mergers. Most mergers typically involve creating a new company by absorbing the assets as well as liabilities of the original companies.
- Equal Control: The control, as well as the management, may be made equal for the firms being merged, but the latter was mostly shared with the shareholders of the merging companies.
What is an Acquisition?
An acquisition occurs when one company buys out another. The acquiring firm assumes control of the target firm, but the latter ceases to be legally existing. Acquisitions are not necessarily a mutually agreed-upon merging process. The acquired may be absorbed by the acquiring or it might continue in operation as a subsidiary.
Key Characteristics of an Acquisition
- Purchase of One Company by Another: When one company acquires the majority or all shares or assets of another company.
- Retained control: The acquiring firm acquires another firm, and control remains there; the acquired firm may even be converted into a subsidiary or fully absorbed into the acquiring firm.
- Size Difference: Acquisition is typically an event where a large corporation makes an acquisition of a small-sized firm; however, it does not have to be.
Difference Between a Merger and an Acquisition
Even though the two activities are inspired by the same goal of corporate growth and expansion, mergers and acquisitions are two different processes that carry with them a different set of consequences for the companies undertaking them. A good knowledge of the differences will help a business realize which strategy is best suited for the attainment of its goals.
Structure
- Merger: Merging refers to the integration of two companies of approximately equal size and market value. A new entity is formed, and the shareholders of both companies receive shares in the newly established company.
- Acquisition: Acquisition is the acquisition in which one company buys another by acquiring its assets or shares. Here, the existence of the acquired may even eradicate or become a subsidiary of the acquiring firm.
Control
- Merger: In a merger, often the management and shareholders of both firms share control over the new entity. The new entity will employ a new management structure headed commonly by representatives from both companies.
- Acquisition: In acquisition, the acquiring company fully takes over the target firm. It is observed that, in most acquisition situations, the management of the target firms can be replaced, and the acquirer company commands the acquired company.
Legal Identity
- Merger: In a merger, the legal existence of both merging corporations comes to an end; a new corporation is formed, and their assets and liabilities are transferred into this newly formed corporation.
- Acquisition: This is when the buyer company maintains its legal identity, with the target company being dissolved or maintained under its original name as a subsidiary.
Financial Outcome
- Merger: In the case of a merger, shareholders from the two companies are normally given equities in the newly formed one. Consequently, this acts to merge the ownership of two companies and eventually, the profits will be shared.
- Acquisitions: In acquisitions, the acquiring firm could buy a direct share of the target firm’s shares by offering a premium to the shareholders of the target company. Normally, the shareholders of the target company are bought out and become subjected to the financial benefits of acquisition by the acquiring firm.
Intention
- Merger: A merger is generally understood as a friendly and mutual decision for the merging of two companies to save resources and strengthen them in the market.
- Acquisitions: Acquisitions may either be friendly or hostile. Hostile acquisition is one whereby the acquirer takes control of the target company without the management’s approval of the target.
Why It Matters
It is crucial to know the difference between a merger and an acquisition because the two types of strategies possess very different implications regarding ownership, control, financial results, and corporate culture. The choice depends upon how much the goals of the respective company emphasize expansion through control or growth through collaboration.
Strategic Goals
- Mergers allow companies to combine strengths and merge with other firms that will help them concerning strengths or benefits to exploit in competitive or high-regulated industries. For instance, pharmaceutical or telecommunication companies might be attracted to merge to gain higher research and development resources or to expand their market presence.
- Acquisitions are rapid growth methods through which companies can obtain new markets, and new technologies, or eliminate competition. Most companies prefer acquisitions as a growth strategy when they want aggressive growth.
Cultural Fit
- Mergers would thus need careful integration of corporate cultures. Such a poor cultural fit might easily lead to friction or inefficiency, which adds complexity to the task post-merger.
- Acquisitions have their own issues, mainly because the two firms are largely perceived to have different cultures. In the event the target firm has a culture quite distinct from that of the acquiring firm, this is bound to be even more difficult in hostile acquisitions. Key employees may also leave the acquired company in such acquisition events.
Legal & Financial Considerations
- More complex in the requirements of the law, mergers require the approval of the boards of directors and shareholders of the companies involved. Regulators may also become more vigorous in investigating mergers for potential monopolistic practices.
- Acquisitions are usually easier to implement but may be very costly in terms of money since an acquiring firm has to pay a premium to acquire the target company.
The same kind of problems occur in mergers and acquisitions, and these need to be dealt with after a lot of contemplation since they involve several legal frameworks, such as compliance with competition law, taxation consideration, and seeking regulatory clearances. For business houses in India, attending business law courses will keep them on their toes about the complexities that would happen during merger and acquisition processes.
Conclusion
Mergers and acquisitions are strong corporate strategies for growth, but the understanding of the difference between them would serve as the basis of fact during any business decision. The term “merger” refers to integration where two companies combine into one new entity. Acquisitions, in contrast, reflect an idea where one company gains dominance over another. Each of these has varying implications on the concept of ownership and control and financial outcomes. Businesses buy or merge while always considering strategic objectives, cultural suitability, and their legal commitments toward ensuring long-term success.
