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Merger vs Acquisition Overview
Many will use the terms merger and acquisition interchangeably.
However, the terms “merger” and “acquisition” do not have the same meaning.
In this post, I will tell you exactly what are the differences between mergers and acquisitions so you’ll know precisely when to use them.
To better understand the meaning of merger vs acquisition, let’s look at each of these terms separately.
What Is A Merger
A merger is a type of transaction where two companies combine to form a new business entity.
When two companies merge, a new legal entity is created where the shareholders of the merging companies will acquire shares and the previous organizations are dissolved.
For example, Company A and Company B decide to merge to form Company C where the shareholders of Company A and Company B will become the shareholders of Company C.
Then, Company A and Company B are dissolved.
Going forward, Company A and Company B no longer exist and they continue all business operations under Company C as one single business unit.
What Is An Acquisition
An acquisition is a type of transaction where one company acquires another company without merging with it.
In essence, the acquiring company will continue to exist and will absorb the acquired entity into its business operations without changing anything to the target company.
For example, Company A acquires Company B.
Company A will purchase all the shares of Company B and take control of Company B’s legal entity.
Following the acquisition, both Company A and Company B continue to do business and both legal entities continue to exist.
The main difference is that the Company B shareholders have sold all their shares to Company A.
Difference Between Merger And Acquisition
The main difference between an acquisition and merger is that an acquisition is when a company acquires another company without creating a new legal entity whereas a merger is when the acquirer merges with the target to form a new legal entity.
There are many reasons and motivations why a company will choose to merge with another instead of going through with an acquisition.
Let’s look at the key differences between mergers vs acquisitions.
In the context of a merger, you need at least two or more entities to merge into one single business entity.
On the other hand, with an acquisition, the acquirer will only need to acquire at least 51% of the target company’s stock to gain control over the target’s business.
Friendly vs Hostile
Mergers are generally more friendly as the merging entities mutually agree on the terms of the merger.
However, acquisitions are more hostile and may not be upon mutual agreement.
If a company is able to acquire at least 51% of the other company’s stock (with or without the target’s consent), it will be able to effectively take over the control of the target’s business.
In the context of a merger, the merging entities will generally adopt a new name under which they will jointly operate going forward.
For example, at some point, Daimler-Benz and Chrysler merged to form a new entity called DaimlerChrysler.
In acquisitions, the acquiring company will typically decide if the target company will continue using its name going forward or adapt the acquiring company’s name.
Mergers typically involve companies of equal stature, size, scale, and negotiating power.
This is typically called the “merger of equals”.
As a result, the two merging companies find a mutual arrangement to merge their business into a new legal entity.
Acquisitions generally involve companies of different sizes, scales, and power.
Generally, the acquiring company is much stronger financially and operationally than the target company.
As such, acquirers will acquire 51% of the target company’s shares and start imposing their will.
In a merger, two companies of comparable power and size will merge into one entity in which they will each dilute their power.
Going forward, the two merging entities will have less power individually and will need to work things out through negotiations and mutual agreements.
However, in acquisitions, the acquiring company will continue to exert its power over the acquired entity.
In a merger, the merging entities will generally perform a share-for-share swap where each of the merging entities receives a portion of the shares in the newly created entity.
The shareholders of the merging entities exchange their shares to get new shares in the post-merger entity.
As such, mergers are typically done through share swaps and do not involve a lot of cash.
In an acquisition, the acquiring company will generally use cash to purchase the shares of the target company.
The objective is for the acquiring company to acquire at least 51% of the target company’s shares so it can take control over it.
As a result, in acquisitions, you’ll need a lot of cash to complete the takeover (shares are not issued in the process).
Why Merger vs Acquisition
What are the reasons why some companies prefer to merge with another whereas in other cases they prefer to acquire another?
Although this is not the case all the time, it’s more likely that a merger is a more “friendly” transaction than an acquisition.
For two companies to merge, they need to mutually agree on the terms of the merger, collaborate with one another to form a new business entity, decide the proportion of shares they will own in the new entity, and how to continue doing business as one single entity.
Companies tend to merge for different reasons, such as:
- Increase revenues
- Enter new markets
- For competitive advantage
- To grow the business
- Reduce cost
- Find synergies
On the other hand, an acquisition is more of a “hostile” transaction.
In many cases, there is an imbalance of power between the acquiring company and the target where the acquiring company imposes its acquisition terms and conditions.
A company may prefer the acquisition path for many reasons, such as:
- To accelerate its penetration into a market
- To access a company’s know-how
- To get rid of competition in the market
- To acquire resources
- To acquire market positioning
- Or even to speculate
Quite often, companies will consult lawyers, accountants, and M&A professionals to consider the pros and cons of structuring a transaction in a certain way so they are better equipped to negotiate and know how to better structure the deal.
Negotiating A Merger or Acquisition
What are the key considerations when negotiating a merger or acquisition?
Companies negotiating a merger typically tend to focus on the proportion of shares each merging entity will have in the new entity.
For instance, Company A and Company B may agree to have a 50/50 ownership in the new entity (Company C) if it’s a merger of equals.
However, Company A and B may decide that the first will have a 60% ownership in Company C whereas the other will have a 40% ownership.
Also, in most mergers, there’s no cash involved.
This means that the merger transaction is done through a share-for-share swap.
On the other hand, negotiating an acquisition principally revolves around the purchase price the acquiring company will pay to acquire the target.
Since acquisitions are more hostile, the acquiring company uses cash consideration to entice the shareholders of the target company to sell their shares.
As a result, acquisitions tend to require a lot more cash than shares to conclude the transaction.
Merger vs Acquisition Example
Let’s look at an example of a merger vs acquisition to better understand the difference between the two M&A transactions.
A well-known merger was that of H.J. Heinz Co and Kraft Foods Group Inc. in 2015.
H.J. Heinz Co and Kraft Foods Group Inc. merged to form Kraft Heinz Company.
In this merger, the Kraft and Heinz shareholders surrendered their shares in Kraft and Heinz and obtained shares in the new company called Kraft Heinz Company.
This allowed the new entity to scale, enter new markets, access more consumers, and have more production resources.
An example of an acquisition is that of Amazon and Whole Foods in 2017.
In this case, Amazon being a much stronger company financially acquired Whole Foods for $13.7 billion effectively taking over the Whole Foods business.
With this acquisition, Amazon was entering new markets and leveraging the purchase to immediately acquire physical locations allowing it to sell groceries in the future.
Merger vs Acquisition FAQs
Let’s look at a few common questions related to the difference between mergers and acquisitions.
How do mergers differ from acquisitions
A merger is when two companies combine into one entity and dissolve the old entities.
In essence, following a merger, the two merging companies are dissolved and one new entity is formed where both businesses are joined under the same banner.
An acquisition is when a company purchases another company without combining the business entities.
Following an acquisition, the target will continue to exist and do business but now under the control and acquiring company.
How do you finance mergers and acquisitions
Both mergers and acquisitions can be financed in different ways.
There are different types of financing methods possible, such as:
- Stock purchase
- Cash consideration
- Assumption of debt
- Leveraged buyout
Stock purchase is when a party issues shares to acquire the shares of another company or assets of another company.
Cash consideration is when a company offers cash to purchase the shares of another company.
Assumption of debt when the acquiring company assumes the target company’s debt.
A leveraged buyout is when the acquiring company finances the purchase by raising debt financing.
What is a hostile takeover
A hostile takeover is when an acquiring company takes positive steps to acquire another company (the target) when the target’s board of directors has specifically rejected the acquisition or offer.
In a hostile takeover, since the target company is opposed to the acquiring company taking it over, the acquiring company will actively purchase shares in the target company to achieve a controlling stake.
When the controlling stake is achieved, the acquiring company elects new members to the board of directors and starts taking control over the organization.
Merger Versus Acquisition Takeaways
So there you have it folks!
Differences Between Mergers vs Acquisitions
Are mergers and acquisitions the same you might ask?
The answer is, no!
There’s a lot of confusion about the meaning of merger vs acquisition mainly due to the general use of the phrase “mergers and acquisitions” or “M&A”.
M&A is a general term used to refer to the consolidation of companies that can be done in a variety of ways such as mergers, acquisitions, consolidations, purchase of assets, management acquisition, or others.
However, the terms acquisition and merger do not have the same meaning.
The difference between a merger and acquisition is that an acquisition is when a company buys another company outright whereas a merger is when two companies combine into one single entity.
Now that you know the difference between business merger and acquisition, why one may be preferred over the other, and how they work, good luck in your research or M&A transaction!
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