Merger and acquisitions – two of the most well-known and sought-after transactions in the business world, but also two of the most misunderstood terms. There are significant differences between a merger and acquisition and the terms often get blended and used in conjunction with one another, and some do not realize the key differences.
Although mergers and acquisitions are two different acts, the main goal of both is to stimulate growth, increase market share, and gain competitive advantages.
What Is a Merger?
A merger occurs when two separate entities combine services to create a new, joint corporation. The company will see new ownership and a new management and business structure containing members of both combined firms.
There is a distinction that can certainly set these two terms apart- a friendly merger, or hostile acquisition. Mergers require no cash to finish, but it does reduce the company’s individual power. Friendly mergers do not happen often, as you can imagine most companies will not benefit from combining forces with two different power and money hungry CEOs.
New stocks will also have to be issued under the name of the new organization. Mergers are typically done to reduce operational costs, expand into new markets, and boost revenue and profits. They are usually strategically planned with a specific goal in mind for the business.
What Is an Acquisition?
An acquisition is the takeover of one entity by another, meaning a new company does not emerge from this transaction. The smaller company is usually swallowed by the larger one and struggles with its assets becoming part of the larger company. Due to the negative connotation, many acquiring companies refer to an acquisition as a merger even when it is obviously not.
In comparison to a merger, acquisitions require large amounts of cash. But contrast to a merger, the buyer’s powers with an acquisition are absolute. Some of the reasons companies undergo an acquisition is to improve their market share, reduce costs, and expand into new products.
Why Do Companies Go Through a Merger or Acquisition?
- Growth- It takes much less time to grow with an M&A compared to natural growth.
- Competition- Companies want to acquire impressive companies before their rival does.
- Synergies- Two businesses that have similar services or products can combine to create a powerhouse.
- Domination- Companies want to dominate their sector or market.
- Tax Purpose- Companies in the United States will use M&A to move the company’s entity overseas to a lower tax jurisdiction, since the United States has the highest corporate tax rate.
| Basis for comparison | Merger | Acquisition |
| Definition | The merger is a process in which more than one companies come forward to work as one. | The acquisition is a process in which one company takes control of another company. |
| Terms | Considered to be friendly and planned. | Considered to be hostile and sometimes involuntary (not always) |
| Title | A new name is given. | The acquired company comes under the name of the acquiring company. |
| Scenario | Two or more companies that consider each other on equal terms usually merge. | Acquiring a company is always larger than the acquired company. |
| Power | The power-difference is almost nil between the two companies. | The acquiring company gets to dictate terms. |
| Stocks | Merger leads to new stocks being issued. | In an acquisition, there are no new stocks issued. |
| Example | Merging of Glaxo Wellcome and SmithKline Beecham to GlaxoSmithKline | Tata Motors acquisition of Jaguar Land Rover
–Wall Street Mojo |
NOW CFO Has the M&A Expertise You Need
NOW CFO provides of a range of pre- and post-Merger and Acquisition accounting services. Our consultants can assist with all due diligence related efforts, buyer and seller side, before and during a sale. With visibility of the total performance of the target business and assistance in negotiation of favorable deal terms, you will be able to identify opportunities to capture the most value post deal.
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