Businesses of all sizes can benefit from mergers or acquisitions, which are two separate but similar concepts. A merger happens when two or more different entities come together under the same umbrella, while an acquisition is when a larger company buys a smaller one. Here are more details on how mergers are similar and different from acquisitions.
When Companies Merge
A merger is more of a union of companies to form a stronger organization. There are various reasons for this strategy, including strengthening balance sheets, paying down debt, working with more experienced management, consolidating labor, cornering a market and more. Many times mergers happen between like-minded companies going for the same target market. But they can also be the culmination of several different business types consolidating to form a conglomerate that puts them in competition with bigger players.
Mergers are common in the tech industry, as software developers often merge with marketing firms for maximum reach. From a legal standpoint, a merger requires the resulting firm to create a new entity, which often becomes both company names separated by a hyphen to indicate a new ownership. It’s further required to develop a new management structure, which commonly involves players from both teams.
Why Acquisitions are Different From Mergers
Unlike mergers, acquisitions are management and financial takeovers. That means organizations that want to maintain decision-making should look for merger opportunities instead of being bought out by a bigger firm.
When a larger company purchases a smaller enterprise it often benefits both parties. But when a larger firm aggressively buys over 50 percent of another company’s shares without agreeing on terms, it’s known as a “hostile takeover.” This phrase is also applied to scenarios in which the acquirer attempts to make management changes in the target company.
How Mergers and Acquisitions are Alike
One of the main reasons many people confuse mergers with acquisitions is that they are often stated in the media as a pair instead of separate actions. Financial publications often write about “mergers & acquisitions” as a pair of strategies that bring different entities under the same or shared leadership.
When either event makes the news it can affect a stock price positively or negatively, depending on the situation. Another similarity is both actions are designed to improve capabilities for the organizations involved.