Mergers vs Acquisitions | Top 7 Differences (with Infographics)

Difference Between Mergers and Acquisitions

Merger refers to consolidating two or more business entities to form one joint entity with the new management structure, ownership, and name, capitalizing on its competitive advantage and synergies. In contrast, the acquisition is the case where one financially strong entity takes over or acquires a less financially strong business entity by acquiring all shares or shares with a value greater than 50% of its total shares.

Both are corporate strategies aimed at increasing the present capabilities of a company. Sometimes both terms are misunderstood as merely adjoining two or more companies, but these terms are quite different. Various key aspects form the basis of differences between them, for example, purpose, objectives, and mutual agreement. Understanding them can help eliminate any kind of confusion.

Key Takeaways

Mergers refer to agreements between 2 or more companies to form a combined entity with a new name, financial structure, and management structure.
On the other hand, an acquisition involves the takeover of a smaller entity by a larger company via the purchase of the majority of the shares.
No fresh issue of shares takes place in the case of acquisitions, unlike mergers.
Mergers involve mutual agreement of the companies forming the combined entity. In contrast, an acquisition may involve a mutual agreement.
Generally, mergers are more complex than acquisitions in terms of financial and legal standpoints.

Mergers vs. Acquisitions Infographics

Reasons For Mergers And Acquisitions (M&As)

Let us look at some popular reasons why businesses may decide to participate in M&As.

Diversification: Companies often engage in M&As to diversify their services, market segments, or product lines. This diversification helps them in minimizing risk.
Economies Of Scale: Mergers can allow companies to reduce costs by utilizing the same resources. This raises the operational efficiency and production capacity.
Market Expansion: Organizations may decide to acquire or merge with another company to expand market operations.
Synergy Development: These deals aid in synergy development as companies can use complementary sets of capabilities and resources to optimize resource allocation and enhance efficiency.
Tax Benefits: A few companies acquire other organizations or merge with them to get tax advantages. For example, after completing a merger, organizations can lower the tax payable because of the spreading of financial losses.
Market Share: Acquisitions, as well as mergers, allow companies to improve their market share. This is because, as a result of these deals, competition is reduced, and companies can improve their position within the industry.
Access To New Expertise Or Technology: Another key motivation can be the ability to access new intellectual property or improved technology following the acquisition or merger.
Improvement In Brand Value: Mergers and acquisitions can have a positive impact on the goodwill and brand value of both companies.

Key Differences

One of the key differences is that the merger is when two or more companies agree to come together and form a new company; an acquisition is when a financially strong company takes over a less financially strong company by buying more than 50% of its shares.
The merger is a strategic decision made after careful discussion and planning between the companies going to be merged. Hence, there are fewer chances of a chaotic atmosphere after merging. The acquisition is also a strategic decision, but the decision is not mutual in most cases. Hence, there is a lot of hostility and chaos after an acquisition has been made.
The power difference between the acquired and acquiring companies is huge. Companies that are merged usually consider each other of equal stature, and hence they help each other out to create a synergy. In the case of an acquisition, the company that acquires it imposes its will on the acquired company, and the acquired company is stripped of its freedom and decision-making.
Since the merger requires a whole new company to be formed, it needs many legal formalities and procedures to be followed. The acquisition doesn’t have many legal formalities and paperwork to be filled compared to the merger.

Merger vs. Acquisition – Comparative Table

Basis for Comparison	Merger	Acquisition
Definition	The merger is a process in which more than one companies come forward to work as one.	The acquisition is a process in which one company takes control of another company.
Objectives	The main goals of a merger are cost reduction, taking advantage of economies of scale, and creating synergies.	The main objective of an acquisition is to gain a strategic advantage, for example, decreased competition in the market.
Mutual Agreement	A merger results from the mutual agreement between the involved parties.	An acquisition may not involve mutual agreement. One company can take over another organization without the latter’s consent.
Legal And Financial Complexity	Generally, mergers are more complex as they involve the formation of a new company, which requires a thorough study of the liabilities, assets, and shares.	Acquisitions are less complicated than mergers, as the acquiring company directly purchases the assets or stock of the target company.
Identity Of the Company	In this case, the involved organizations lose their original or initial identities.	Following an acquisition, it is possible for the target company to lose its original identity. However, this does not always happen.
Comparative Stature	In this case, the parties involved are typically of the same stature and size. Also, the scale of operations of the organizations is similar.	In this case, the acquiring company is generally larger than the target company. Moreover, the former is financially stronger.
Power	The power difference is almost nil between the two companies.	The acquiring company gets to dictate terms.
Stocks	Merger leads to new shares being issued.	In the case of an acquisition, the issuance of new shares does not occur.
Example	Merging of Glaxo Welcome and SmithKline Beecham to GlaxoSmithKline	Tata Motors acquisition of Jaguar Land Rover

Conclusion

We may decide that a merger is always better than an acquisition when comparing mergers and acquisitions. But just like how each coin has two sides, both have their strengths and weaknesses.

Companies make these decisions based on their situation and the resultant discussions that they have had with the other companies. So, it is wise for companies to carefully analyze the position that they are in and take the strategic decision that better suits the scenario and demands.

Frequently Asked Questions (FAQs)

How do mergers and acquisitions affect stock prices?

These points can help understand the impact of M&As on stock prices:

The news of the M&A deals results in the volatility of both companies’ stock prices.
After the reason for the merger or acquisition becomes public, that reason acts as the driving force with regard to the stock prices.
The acquirer pays a premium to the company being taken over. The target company’s stock price increases because of receiving this premium.
Generally, the stock price of the acquiring company decreases because it has to pay the premium. That said, this does not happen in the case of every deal, especially when the takeover has a significant impact on competitors.

What are the risks of mergers and acquisitions?

Common risks associated with mergers and acquisitions are as follows:

Overvaluation of the target company
Insufficient due diligence procedures
Unforeseen costs
Inadequate transparency and communication

How much time is taken for mergers vs. acquisitions?

Generally, mergers take more time than acquisitions, as the former involves the establishment of a new company, complex negotiations, and changes in the financial structure. That said, the time taken may vary based on factors like the deal’s complexity and the applicable regulations.