Mergers vs. Acquisitions – Difference, Types & Advantages

The corporate environment is dynamic, and companies are strongly motivated to acquire, consolidate or optimise their business models. Arguably, one of the most important strategic moves would be mergers and acquisitions (M&A).

These terms are frequently used interchangeably but correspond to different kinds of business transactions with differing consequences. Knowing the merger and acquisition differences is paramount for businesses seeking growth, restructuring or consolidation. So, let’s get into the details:

What is a Merger?

A merger is when two companies of similar size and market power combine to form a single entity. This is often a collaborative effort by both organisations to create new opportunities that allow them to expand and dip into a deeper market vertical by sharing the project’s costs. Mergers are typically “friendly” and have a smoother integration experience, including mutual control and ownership mechanisms.

Read Also – Mistakes to Avoid While Selling a Business

Types of Mergers

1. Horizontal Merger: The merger of two competing businesses within the same industry to strengthen market dominance.
2. Vertical Merger: A corporation merging with its supplier or distributor to improve the supply chain.
3. Conglomerate Merger: Unrelated businesses from different industries come together to diversify operations.
4. Market-Extension Merger: When two companies selling similar products in different markets combine to expand geographic scope.
5. Product-Extension Merger: Merging businesses across different but related product lines to complement one another.

A merger means that both companies will legally cease to exist, and a new corporate entity will be formed. This demands transforming the legal structure, rebranding, and aligning leadership and company culture.

Advantages of Mergers

• Market Expansion: Partnering with another company grants complementary skills and a larger customer base.
• Cost Savings: Helps to operate more efficiently with lower costs and more efficient use of resources.
• Innovation & Growth: Collaboration usually promotes innovation due to mutual technology and expertise.

What is an Acquisition?

An acquisition happens when one company acquires and has 100% control over another business. Unlike mergers, acquisitions do not require mutual agreement. Some are friendly, but others can be hostile if the target company refuses to accept the deal.

Types of Acquisitions

1. Friendly Acquisition: The target company willingly agrees to be acquired.
2. Hostile Acquisition: The acquiring organisation bypasses management and directly approaches shareholders to gain control.
3. Asset Acquisition: A company purchases the assets of another business and not the entire corporate structure.
4. Stock Acquisition: The acquiring firm buys the majority or all of the target company’s shares and gains full ownership. Read – Stock Purchase VS Asset Purchase

The acquired business usually loses its independent identity and becomes a part of the larger company. The buyer has full authority over decisions and operational integration.

Advantages of Acquisitions

• Quicker Access to Market: By purchasing an existing business, you gain immediate access to new markets.
• Brand Leverage: The buyer can leverage the acquired brand’s reputation and customer loyalty.
• Operational Synergies: Duplication of processes is eliminated, thereby enhancing overall efficiency.

Key Differences Between Mergers and Acquisitions

Both processes share a common goal of increasing business growth. However, they differ in structure, control, and implementation techniques.

1. Company Size and Power Dynamics

In a merger, both companies tend to be of equal size and financial strength, thus facilitating integration. Acquisitions usually involve a larger and financially stronger company taking over a smaller or financially strapped firm.

2. Control and Ownership

Mergers create shared ownership whereby both companies have equal voting power with respect to decision-making. In the case of acquisitions, the acquiring business takes over entirely, and the acquired business has to align itself with new corporate strategies and leadership.

3. Legal and Structural Changes

A merger creates a brand-new corporate entity. An acquisition just integrates the target company into the buyer’s existing operations. Mergers demand more legal work in terms of contract renegotiation and branding. They often need to involve a Sale of Business Agreement Lawyer Perth. Acquisitions, on the other hand, can be simpler, particularly if you’re buying a majority stake in an existing business.

4. Cultural Integration

A good merger needs a perfect convergence of corporate cultures. It can be a demanding task if the two companies don’t function the same way. In acquisitions, the dominant companies impose their culture on a current business. Employees from the acquired company might resist such a transition.

5. Branding and Identity

Companies choose to rebrand under a new name or operate as a hybrid entity after a merger. In acquisitions, the acquiring company usually retains its brand name. The acquired firm may either operate as a subsidiary or be completely absorbed into the parent brand.

Which Strategy is Better?

The decision of whether to merge or acquire will depend on the business objectives, financial resources and strategic plans of a company. If two businesses have the same goals for growth and need to be equal, then a merger is the best way forward. On the other hand, if a company is looking for fast growth, brand prominence or financial restructuring, an acquisition is usually the better option.

Conclusion

Mergers and acquisitions are similar in intent, but they play out very differently. Mergers can involve mutual agreement, shared leadership, and the creation of a new company. But, acquisitions focus more on one company absorbing another. The Best Commercial Lawyers Perth can help businesses identify their appropriate corporate growth strategies.