There are many ways to grow a business, but one way to grow a business quickly is by combining two businesses into one business. Two businesses can become one through either a merger or an acquisition. While these two terms are often mentioned together, the difference between mergers and acquisitions is important to understand.
In a merger, two companies combine to create a completely new company. However, in an acquisition, a larger company absorbs a smaller company into it. In this article, we’ll discuss the differences between mergers and acquisitions, as well as the pros and cons of each.
What are mergers?
Mergers happen when two companies combine to become a new company. Some examples from recent history include Exxon and Mobil joining to create ExxonMobil, Kraft Foods, and H. J. Heinz Company merging to create the Kraft Heinz Company.
The new company’s leadership is often made up of leaders from both companies. Typically, the merging companies are similar in size and operations.
In a merger, both companies stand to benefit. They can combine to increase their customer base, reduce costs, increase revenue, and expand into new markets. Together, companies can combine their knowledge and benefit from each other’s resources.
What are acquisitions?
Acquisitions happen when a larger, stronger company absorbs a smaller company. The larger company buys 51% or more of the smaller company’s shares and gains total control over the acquired company. The smaller company may cease to exist or continue operating under its same name, but either way, it is now controlled by the acquiring company.
Acquisitions can be hostile when the acquired company would rather not be acquired. However, they can be amicable when a smaller company is struggling and can benefit from the larger company’s resources, such as increased capital or market share. The larger company can benefit from the acquired company by increasing its market area, diversifying its products or services, or gaining proprietary knowledge or products from the acquired company. Both companies can benefit from an acquisition, just as both companies can benefit from a merger.
Key differences between mergers and acquisitions
Even though these two processes seem similar, they are very different. Here are a few of the key differences between mergers and acquisitions. And no matter which method the companies choose, the role of due diligence in mergers and acquisitions will ensure both companies fully understand the relationship and what will happen after the merger or acquisition.
New company versus the same company
In a merger, both companies involved disappear. The companies combine and create an entirely new company.
In an acquisition, the acquiring company keeps its name and operating structure. The acquired company may disappear altogether, or it may continue operating under its same name; either way, the acquiring company controls it.
New name versus an old name
The two companies that merge will create a new name for their new company. It may be a combination of their previous names or a new name altogether. Whether they combine their names or create an entirely new name, a completely new company will be created.
But in an acquisition, the acquiring company will keep its name. The acquired company may operate under its old name, or it may simply be absorbed into the acquiring company.
Collaborative leadership structure versus takeover structure
In a merger, the leadership of the new company is often made up of a mix of leaders from the two companies that combined. The leadership team is selected based on what will be best for the new company, and selecting leaders is a collaborative effort to benefit the company as a whole.
In an acquisition, the leadership of the acquiring company remains the same. The acquiring company may select a completely new leadership team for the acquired company if it will continue operating under its old name, or they may allow the previous leaders to continue in a new role working underneath the acquiring company. Executives from the absorbed company may also agree to stay on only for a limited time to assist with the transition.
Shares
Since a merger creates a new company, new shares may be issued for the new company that’s created after a merger.
In an acquisition, the acquiring company may offer the shareholders of the acquired company either cash or shares in the acquiring company to complete the acquisition. An opinion of value before the merger or acquisition can ensure both companies are valued properly.
Pros and cons of mergers versus acquisitions
Each business situation is unique, so whether companies decide to combine through a merger or an acquisition should be a case-by-case decision. However, here are just a few of the things to think about if you’re considering buying, selling, or combining your company with another one.
Pros of mergers
Mergers can work well when the companies coming together are of relatively equal sizes. When the companies combine, they both stand to benefit. They could share proprietary knowledge or tools, combine their market share to strengthen their position, and work together in a way that benefits both companies.
Companies also may be able to lower their expenses by merging. They may be able to create their products more efficiently or save money in other areas such as renting office space and paying for marketing. They can benefit from reduced costs caused by economies of scale.
Another pro of mergers is that it is usually an agreeable situation for both companies. They each bring their own customers and products or services into the relationship. The companies will often keep some (or all) of the same leadership team, combining their experience and knowledge so that leaders of both companies work together to guide the new company. Instead of competing, the companies are now working together.
Cons of mergers
Mergers can have downsides, too. Sometimes, companies going through mergers will need to lay off staff because of redundancies formed by combining the companies. Even if it’s a positive situation for the companies, staff may still be negatively impacted.
Mergers also require both companies to collaborate, but some company leaders may be reluctant to work with former competitors, even if the reasons for doing so look good on paper. Companies with very different cultures may find that a merger doesn’t go as smoothly as they had hoped, and they may struggle to find common ground.
It can take a lot of time to successfully merge two companies, and the time itself can be a downside to mergers. While the companies discuss and manage the logistics of the merger, they may be distracted from their work for the clients, resulting in a period of reduced revenue or customer retention issues.
Mergers can also dilute brand strength, especially if the merging companies are very dissimilar. If customers are confused about what the new company does, they may simply take their business elsewhere.
Pros of acquisitions
An acquisition can be a very different experience from a merger, but both companies can still benefit from an acquisition.
One benefit is that there is a clear leadership team after the acquisition. While the acquired company may be able to retain some of its leadership or staff, the acquiring company can make the important decisions, creating a clear chain of command without the need for negotiating or adding more people to the leadership team.
An acquisition can be a welcome relief for a company that is already struggling to stay afloat. The income created from an acquisition can give shareholders of a floundering company the chance to make a profitable sale while giving the acquiring company resources they can use to expand their footprint or offerings. A confidential information memorandum (CIM) can provide detailed, confidential information about the selling company’s financial situation and prospects.
The acquiring company can have immediate access to resources such as staff, intellectual property, market share, and more. While normal growth trajectories could take years to come to fruition, an acquisition could push a company’s objectives forward much more quickly.
Cons of acquisitions
Acquisitions come at a price, though. Usually, quite literally. The acquiring company may see a drop in its share value as it takes on debt or liquidates assets to pay for the acquisition. There may also be unanticipated costs such as systems integrations or regulatory compliance issues.
Similar to mergers, acquisitions may see duplication of employees’ work, resulting in layoffs. This can cause long-term problems with productivity as employees worry about their role in the acquiring company. Additionally, employees of the acquiring company may decide to quit if they disagree with the acquisition or don’t want to work for or with the acquiring company.
Cultures can also clash in acquisitions, just as they can in mergers.
Final thoughts on mergers and acquisitions
Companies should carefully consider their reasoning before taking part in any merger or acquisition. The decision should be made strategically with an eye toward both the present and the future, and with a careful look at each company’s finances. Mergers and acquisitions can be excellent vehicles to create long-term, strategic growth, but they can also dilute brand value, confuse customers about what the business does, and create more problems than they solve.
There are a lot of steps to think about when structuring a mergers and acquisitions deal. An M&A attorney can provide guidance as you plan, negotiate, and execute your merger or acquisition. They can help you strategize all the pros and cons and think through every aspect of your deal before closing, so you can complete your merger or acquisition with confidence.