Merger vs. Acquisition

Similarities and key differences in terms of initiation, procedure, and outcome

What is a Merger vs Acquisition?

Mergers and acquisitions both refer to the joining of two or more business entities that entails a restructuring of their corporate order. They are aimed at achieving better synergies within the organization in order to increase their competence and efficiency. However, there are key differences between a merger vs. acquisition in terms of initiation, procedure, and outcome.

 

Merger vs. Acquisition

 

A merger occurs when individual organizations decide to join their forces and give rise to a new business entity. On the other hand, an acquisition is a situation wherein a larger, financially stronger organization takes over a smaller one. The latter ceases to exist, and all of its operations and assets are acquired by the larger business enterprise.

 

Summary

  • When two or more individual businesses consolidate to form a new enterprise, it is known as a merger.
  • An acquisition entails one organization acquiring the business of another.
  • Both mergers and acquisitions are aimed at achieving better synergies within the organization in order to increase their competence and efficiency.

 

What is a Merger?

When two or more individual businesses consolidate to form a new enterprise, it is known as a merger. The merged entity usually takes on a new name, ownership, and management that is composed of employees from both companies. The decision to merge is always mutual since the merging companies combine their forces to seek certain benefits, even at the cost of diluting their individual powers. There is usually no exchange of cash.

The motive for mergers may be to expand market share, gain entry into new markets, reduce operating costs, increase revenues, and widen profit margins. The parties to the contract are generally similar in terms of size and scale of operations, and they treat each other as equals. A merged company issues new shares, and the shares are distributed proportionately among existing shareholders of both parent companies.

The British multinational enterprise GlaxoSmithKline was formed by the merger of two pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham, in 2000.

 

What is an Acquisition?

An acquisition entails one organization acquiring the business of another. The acquirer must purchase at least 51% of the target company’s stock in order to gain absolute control over it. It usually occurs between two companies that are not equal in stature: a financially stronger entity generally acquires a smaller, relatively weaker one. It is not necessary for the decision to be a mutual one; when a company takes over the operations of another without the latter’s consent, it is termed as a hostile takeover.

The smaller company continues its operations under the name of the larger one. The acquirer can choose to either retain or lay off the staff of the acquired company. In fact, the acquired company ceases to exist in its previous name and operates under the name of the acquiring company; only in some cases does the acquired company gets to retain its original name. No new shares are issued.

The motives for acquisition are similar to those for mergers. The basic aim is to gain a better competitive advantage by combining resources with another organization.

In 2017, the e-commerce giant Amazon acquired the American supermarket chain Whole Foods Inc. for $13.7 billion. The latter still operates in its original name and is run by the original CEOs John Mackey and Walter Robb; however, all of its operations are controlled by the parent company Amazon.

 

Key Differences between Merger vs Acquisition

The terms merger and acquisition essentially refer to the consolidation of two or more business entities for the purpose of achieving better synergies. The motives for entering into either contract include expanding operations, gaining a higher market share, reducing costs, or boosting profits. However, there are several prominent differences between the two, as summarized in the following table:

 

 MergerAcquisition
ProcedureTwo or more individual companies join to form a new business entity.One company completely takes over the operations of another.
Mutual DecisionA merger is agreed upon by mutual consent of the involved parties.The decision of acquisition might not be mutual; in case the acquiring company takes over another enterprise without the latter’s consent, it is termed as a hostile takeover.
Name of CompanyThe merged entity operates under a new name.The acquired company mostly operates under the name of the parent company. In some cases, however, the former can retain its original name if the parent company allows it.
Comparative StatureThe parties involved in a merger are of similar stature, size, and scale of operations.The acquiring company is larger and financially stronger than the target company.
PowerThere is dilution of power between the involved companies.The acquiring company exerts absolute power over the acquired one.
SharesThe merged company issues new shares.New shares are not issued.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Corporate Structure
  • Friendly Takeovers vs Hostile Takeovers
  • M&A Considerations and Implications
  • Economies of Scale

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI’s M&A Modeling Course!

Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!