Difference Between Merger And Acquisition

Difference Between Merger And Acquisition

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Rashmi
Rashmi Karan
Manager - Content
Updated on Oct 6, 2023 18:58 IST

Learn the concepts and types of mergers and acquisitions of businesses and understand the difference between merger and acquisition.

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Mergers and Acquisitions are vital business strategies. A merger combines two equal companies into one. An acquisition is when one company buys another. Both aim to grow and enhance the market presence of a business. However, they differ in process, structure, and outcome. Many mistake these two concepts to be the same, but they aren’t. Understanding these differences is key in the business world. Lets us understand the difference between merger and acquisition.

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What is a Merger?

The merger of companies occurs when two or more legally independent companies decide to unite their activity by uniting their assets to create a new company. The merger implies a change for all parties since the partners of both companies eliminate their old company, transferring all their assets to the new company. This, in turn, issues shares distributed to the shareholders of the companies that have been dissolved. This is called pure fusion.

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Types of Mergers

The most common types of mergers are:

  1. Conglomerate merger: In a conglomerate merger, two companies decide to merge, without having anything in common, to share assets or reduce their commercial risk.
  2. Horizontal merger: A merger is said to be horizontal when two companies in the same industry are consolidated, more or less the same size, with similar structures, and are within the same market. They are usually competitors who merge to cut costs and gain more market share.
  3. Market extension merger: Market extension mergers occur between companies in the same industry or business sector but in different markets that merge to obtain a much larger market share.
  4. Product Extension merger: In this case, two companies in the same industrial sector but produce different products merge to expand their production, reach more customers, and obtain higher profits.
  5. Vertical merger: A vertical merger is when two companies producing different products in the same supply chain merge to increase their efficiency.

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What Is An Acquisition?

The acquisition of companies is an agreement whereby a company partially acquires another company. The conditions of the agreement will determine the degree of predominance of one or the other. Generally, the criterion of those that have made the most significant contributions —logistical, physical, economic— is usually imposed.

It is essential to understand that the original company may or may not disappear and that the partners in the divided partnership will also be partners in the new partnership.

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Types of Acquisitions

There are five types of acquisitions:

  1. Value creation: When an acquisition seeks value, the acquiring company improves its performance and then sells it again at a profit.
  2. Consolidation: A company acquires another company to eliminate it from the competition since the market is oversupplied.
  3. Acceleration: An acceleration acquisition occurs when a larger company acquires a smaller company because its products are attractive and its more significant resources accelerate market access for the acquired smaller company’s products.
  4. Acquisition of resources: In this case, a company acquires another company to obtain the resources, skills, intellectual property, technologies, or market position they need, since it is more profitable than developing their own.
  5. Speculation: A speculative acquisition occurs when a larger company acquires a smaller company with an innovative new product to maximise its future growth potential.

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Are Mergers And Acquisitions The Same?

No, mergers and acquisitions of companies are not the same. Acquisitions are agreements in which a company acquires all or part of the share capital of the other. It usually happens when a larger company buys a smaller company, which becomes part of the buying company. 

Let us understand the difference between merger and acquisition.

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Difference Between Merger And Acquisition 

Merger  Acquisition 
Definition  Two or more individual companies come together to create a new business entity. A single business completely takes over the operations of another.
Title  The new business gets a new name. The acquired company comes under the flagship of the acquiring company.
Power difference Nil. The acquiring company dictates its terms.
Formation of a new company Yes  No 
Stocks  New stocks are issued. No new stocks are issued.
Purpose  To decrease competition and increase operational efficiency. For quick growth
Examples  – Exxon Corp. and Mobil Corp merger to form ExxonMobil.
– Glaxo Wellcome and SmithKline Beecham merged to form GlaxoSmithKline (GSK).
– Pixar and Marvel with Disney
– Google purchasing the relatively unknown Android.
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Conclusion

Difficulty in integrating two or more different business cultures, teams, and templates makes acquisitions more frequent than mergers. This way, the acquiring company imposes its culture, mission, vision, and values ​​on the acquired company. We hope this article helped you to understand the difference between merger and acquisition. Any company going through a merger or acquisition must follow a well-drawn plan and have clear objectives to ensure business success.

FAQs

Which party usually initiates a merger or acquisition?

Either party can initiate a merger. In an acquisition, the acquiring company typically takes the initiative to propose and negotiate the deal.

Are mergers and acquisitions always friendly?

Not necessarily. While some mergers and acquisitions are mutually agreed upon and amicable, others can be hostile, with the target company resisting the acquisition or merger attempt.

How are mergers and acquisitions regulated?

Mergers and acquisitions are subject to regulatory oversight to prevent anti-competitive practices. Government authorities, such as antitrust agencies, review and approve certain mergers and acquisitions to ensure they do not lead to monopolies or harm consumer interests.

Do mergers and acquisitions always involve cash transactions?

No, mergers and acquisitions can involve various payment methods. While some transactions are cash-based, others may include stock swaps, where the acquiring company offers its stock in exchange for the target company's shares.

What are the potential risks associated with mergers and acquisitions?

Mergers and acquisitions can be complex, and integration challenges may arise, leading to cultural clashes, operational disruptions, and financial difficulties. The acquiring company may also overpay for the target, leading to financial strain.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio