Mergers vs Acquisitions: Differences and Similarities

This article was originally published in Flippa on May 29,2024. Read the full article here.

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While a combination of factors – including interest rate hikes and inflation and geopolitical instability – contributed to a decline in mergers and acquisitions in 2022 and 2023, the M&A landscape is seeing a rebound, with the first quarter of 2024 seeing significant increases in deal volume and sale prices. Mergers and acquisitions are significant for businesses and their industry; when several business units or companies combine into a single organization, that organization enjoys more operational efficiency and access to new markets, while the industry feels the impacts of competition elimination.

While mergers and acquisitions both combine companies in one way or another, there are some fundamental distinctions between the two that carry different implications for stakeholders and organizations. A merger entails two or more companies coming together (merging) to form a single entity, while an acquisition occurs when one company purchases another to gain control or ownership. Understanding the differences between a merger and an acquisition—and which one may make the most sense for your business—is essential to effectively navigating the world of corporate restructuring.

What is a Merger?

A merger combines or fuses two companies into one new legal entity. Typically, both companies are of a similar size and scope, and both stand to gain something from the transaction. A merger usually occurs when two similar companies want to reduce competition or increase market share or when there’s an opportunity to leverage both companies’ offerings to bring new products or services into the market.

The most common type of merger is a horizontal merger, which happens when two companies already offering the same products or services combine. This is a common maneuver for organizations looking to reduce competition with one another and dominate their market. A market extension merger, a type of horizontal merger, allows two companies to operate in a new market, broadening their revenue scope. Companies can also merge vertically if they operate within one another’s supply chain, which helps both organizations reduce costs by effectively cutting out the middleman.

A merger is considered a conglomerate acquisition if the companies operate in separate industries and, on the surface, have little to nothing in common from a business perspective. These types of mergers open up cross-selling opportunities, which can lead to market extensions and improved operational efficiencies.

What is an Acquisition?

An acquisition is a transaction in which one company purchases most or all of another company’s shares to gain control of that company. While most people think of a large, well-known company acquiring another, acquisitions occur all of the time with small- and medium-sized businesses, too.

Typically, the goal of an acquisition is to gain control of the acquired company’s operations, including its assets, facilities, resources, markets, and customers. Most acquisitions are considered “friendly,” meaning that the acquired company’s board of directors agrees to the acquisition, and the acquisition works toward the mutual benefit of both the acquiring company and the company being acquired.

While the term “hostile takeover” has taken on a more colloquial meaning, it originated in the world of mergers and acquisitions. An “unfriendly” or “hostile takeover” happens when an entity takes control of a company without the knowledge or consent of the company’s management. Hostile takeovers don’t have an agreement from the acquired company the way a friendly takeover would; the acquiring company actively purchases large stakes of the acquired company to gain a controlling interest, which forces the acquisition.

Key Differences Between Mergers and Acquisitions

Mergers and acquisitions are two commonly misunderstood words and concepts in the business world; while both terms refer to the joining of two companies, there are key differences involved in their use, including the following:

Control and Governance

Mergers typically result in a more equal distribution of control among the merging entities, while acquisitions often lead to the acquiring company exerting greater control over the acquired entity. This is why acquisitions are sometimes viewed in a more negative light than mergers.

Objective

Mergers often aim for synergy and growth of both organizations, as everyone involved is interested in expanding into new markets and/or improving operational cohesion. By contrast, acquisitions may focus on gaining market share, technology or talent – rather than improving operations or growing the business.

Legal Structure

As their names may suggest, mergers and acquisitions have different legal structures; a merger involves consolidating two legal entities into a separate, new entity, while an acquired company can still retain its separate legal identity even after it’s formally acquired by another organization.

Financial Implications

In mergers, companies may use stock swaps, where one company’s shares are exchanged for another’s. This allows the companies to pay with stock instead of cash, which can have benefits like tax deferrals. Cash payments are an alternative option, but often require substantial capital or debt financing, which may not be possible at the time of the transaction.

Acquisitions, on the other hand, typically involve the purchasing company buying the target’s shares directly. Alternatively, acquisitions may involve buying specific assets of the company, which can be less costly and complex.

Culture and Integration

Mergers often require organizations to unite their organizational cultures into a newly formed identity. Those involved in successful mergers often prioritize cultural compatibility, and both parties are invested in uniting the employees from their respective organizations.

In an acquisition, on the other hand, the acquiring company’s culture often prevails. The acquiring company will often take steps to assimilate the acquired company into its existing culture, values, and norms. This can involve changes in policies, procedures, and management practices to ensure consistency across the organization.

Employee Impact

Both mergers and acquisitions can create fears among employees, who may be worried about how the restructuring and new leadership will impact their careers. That being said, mergers are often viewed in a more positive light, as they result in a more collaborative environment. Acquisitions on the other hand are more likely to lead to changes in employee roles and responsibilities, and even the termination of redundant roles.

What Are the Similarities Between Mergers and Acquisitions?

Just as there are differences between mergers and acquisitions, there are also key similarities between the two strategies, including:

Strategic Intent

While their methods are different, both mergers and acquisitions aim to grow businesses, expand market presence, and/or gain certain competitive advantages. Whether they are undergoing a merger or acquisition, most companies involved in M&A activity share those same objectives.

Change in Ownership

Both mergers and acquisitions often involve a change in ownership. However, oftentimes in a merger, there will be a nuanced organizational shift to incorporate leadership from both sides of the deal. In an acquisition, on the other hand, the acquired entity often comes under the ownership or leadership of the acquiring company.

Regulatory Oversight

Both merger and acquisition processes may require approval from antitrust authorities or regulatory bodies to ensure compliance with laws and regulations. What those regulations involve, however, is dependent on a number of factors, including the industry the involved companies are in, where they are located, and how large they are.

Synergy Potential

Whether a company is involved in a merger or acquisition, combining resources, capabilities, or market positions can greatly benefit both organizations. Bringing together complementary strengths, such as the advanced technology of one company with the deep interpersonal client relationships of another, can enhance the competitive edge of the newly formed organization.

Integration Challenges

There are many challenges associated with integrating operations, systems, and cultures that are shared by organizations undergoing both mergers and acquisitions. Successful integration is crucial to realizing all the intended benefits that motivate mergers and acquisitions, which is why many organizations bring on experts to facilitate the process among employees and leaders.

Advantages and Disadvantages of Mergers and Acquisition Deals

If your organization is considering a merger or an acquisition, there are several vital advantages and disadvantages to think about:

Main Advantages

Both mergers and acquisitions can lead to economies of scale, increased market share, expanded business capabilities, and accelerated growth. Companies get immediate access to talent and technology, as well as new products and markets, without organic research and development.

Main Disadvantages

Mergers and acquisitions alike can negatively impact employees’ jobs – especially if the combination of two companies results in duplicated functions – cultural clashes, and regulatory hurdles. Additionally, they’re incredibly expensive processes prone to overpayment if the company valuation is incorrect.

Are Acquisitions or Mergers More Common?

Acquisitions are more common than “true” mergers because it’s rare for two companies to feel as though they would both mutually benefit from combining resources and staff. Additionally, acquisitions don’t require companies to rebrand or be renamed, ensuring that their marketplace recognition remains and their customer base is relatively unaffected. AT&T’s purchase of Time Warner and Disney’s acquisition of Lucasfilm are well-known examples of acquisitions that were largely motivated by financial positioning and market share – two of the most common reasons for an acquisition.

What Parties Are Usually Involved in Mergers and Acquisitions Deals?

Every merger and acquisition is a unique deal, but several parties will be involved in even the simplest and friendliest transaction. The two companies will be represented along with their shareholders and boards of directors. Legal advisors and investment bankers are also typically involved in the proceedings, especially in the case of an acquisition, and both these parties are collaboratively involved in the negotiations needed to facilitate successful mergers and acquisitions. Finally, accountants, insurance providers and brokers, and municipalities will also be involved as the processes draw to a close to ensure accurate financial handovers and business licensure.

What Are the Main Reasons Why Mergers and Acquisitions Fail?

The inability to secure adequate working capital is one of the biggest challenges that can cause a merger or acquisition to fail; this is typically uncovered during the due diligence process and is an extremely likely cause of a merger and acquisition failure. To ensure a merger or acquisition has the best chance of success, both organizations should conduct thorough due diligence, develop a negotiation strategy, and focus on solid post-merger integration strategies that ensure a cohesive set of employees and skills remain to help the company function well and mitigate any other arising challenges.

Final Thoughts

While mergers and acquisitions essentially achieve the same end result – two companies becoming one – there are a myriad of tax and practical reasons that could drive the ultimate decision to pursue one or the other. With so many complexities and nuances involved in these strategic transactions, it’s best to navigate them with an expert by your side, one who is prepared to help a company merge with another, acquire another, or be acquired to fully realize its strategic objectives. Either way, it’s important that business leaders plan thoroughly and prepare their employees for the impacts of this shift on their work and culture.

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FAQ Section

What defines a merger and an acquisition in business?

A merger is the voluntary combination or fusion of two companies into one new legal entity. An acquisition is a transaction in which one company purchases most or all of another company’s shares to gain control of that company.

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Are mergers and acquisitions interchangeable terms in corporate strategy?

Mergers and acquisitions are often used interchangeably, but the two terms technically have different meanings. Typically, mergers result in one company’s name or brand being used, which can look like a takeover or acquisition.

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What regulatory oversight is involved in mergers and acquisitions?

Mergers and acquisitions can be rife with regulatory issues related to antitrust laws, securities laws, company laws, and investment laws. This is why legal advisors are vital to the merger and acquisition process, alongside a financial advisor, accountant, or investment bank. The Securities and Exchange Commission is the external regulatory body regulating mergers and acquisitions in the United States.

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What distinguishes mergers from acquisitions in corporate transactions?

In an acquisition, one company purchases the other outright, either through a predetermined agreement or by buying the majority of shares (sometimes called a “hostile takeover”). In a merger, two businesses agree to combine and create a new legal entity under a new corporate name.

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What are the benefits of mergers and acquisitions for businesses?

Companies involved in mergers and acquisitions get immediate access to top talent and technology, which gives them the ability to scale. They also see an overnight increase in their topline balance sheet and gain access to new products and markets without needing organic research and development.

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What common challenges are faced during merger and acquisition processes?

Regulatory issues and missing business licensures are incredibly common. Cultural clashes are another concern; when two companies are combined, there may be no shortage of interpersonal challenges between employees trying to understand how they can work together.