Mergers and acquisitions represent the most far-reaching and transformative corporate actions any company can take.
M&A transactions affect the careers and lives of employees, tilt the balance of power in the industry market and redefine the capital structure and stock value.
The mergers and acquisitions industry is exceptionally prolific, as the value of global M&A deals reached its peak of nearly six trillion U.S. dollars in 2021.
Although often used interchangeably, the terms merger and acquisition denote distinct methods of company consolidation.
This article will clarify the differences between mergers and acquisitions, explain how these transactions work, and outline some of the leading M&A types and well-known examples.
As we’ve already mentioned, the concepts of mergers and acquisitions are frequently used synonymously. As both terms refer to the act of consolidation of multiple companies to form a new business entity, using them interchangeably is not a fundamental error.
However, if you’re thinking of taking part in an M&A deal or simply want to gain a better understanding of the corporate events, you ought to know the intricacies between the definitions of mergers and acquisitions.
The principal difference between the two transactions is that a merger indicates two companies forming a new business, whereas an acquisition represents the purchase of one company by another without creating a new corporate entity.
However, each instance of an acquisition or a merger is unique, so it is sometimes challenging to make a clear-cut differentiation between the two concepts.
The following table outlines the main differences between mergers and acquisitions:
A merger represents a voluntary consolidation of assets of two separate companies into a single, new business entity. This business transaction usually takes place between two companies roughly equal in size, target customers, and scale of operations.
Corporate mergers usually ensue for the mutual advantages of both companies. Joining forces and operating as a single company through a merger can yield benefits such as:
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As defined earlier, mergers occur between two identical business entities that form a new company. In a merger, both companies’ stocks will be issued under the new entity’s name, whereas shares are distributed to present shareholders of both merging businesses.
There are five types of mergers: horizontal, vertical, conglomerate, congeneric, and market extension.
A horizontal merger represents a merger between companies that provide similar services, operate in the same industry, and target identical customers.
Horizontal mergers frequently occur among competitors who want to claim a larger market share and unite production operations.
An example of a concentric merger would be a merger between tire manufacturers.
Vertical mergers are identical to horizontal ones, except merging companies are in different stages of production.
In other words, businesses sell different products but share supply chains. A vertical merge generally aims to improve production efficiency.
An example of a concentric merger would be a tire manufacturer merging with a car production business.
Conglomerate mergers occur between two completely different businesses operating in distinct industries. These mergers most commonly aim to reduce risks, combine assets, access new markets, or expand product lines.
An example of a conglomerate merger would be a tire factory merging with a rubber-products manufacturer.
A concentric merger refers to a merger between two businesses that share a customer base but offer unique products and services that complement each other. This merger type is also known as a product extension merger.
An example of a concentric merger would be a tire manufacturing company merging with a rim-making company.
Market extension mergers represent the merging of two companies that operate in the same industry but in different markets. The goal of these mergers is to widen the client base.
An example of a market extension merger would be a merger between two tire manufacturing companies operating in, e.g., the USA and Canada.
In 1999, Exxon Corp. and Mobil Corp., the first and second-largest U.S. oil producers, blended into ExxonMobil in an $80 million merger. ExxonMobil thus became the most significant oil company globally, whose investors have since quadrupled their money.
In 2008, rivals Sirius Satellite Radio and X.M. Satellite Radio joined forces in a $3.3 billion merger. Thanks to the radio’s celebrity roster, including Oprah, Howard Stern, and Martha Stewart, the merger was a success.
Acquisition refers to purchasing the entirety or a portion of corporate shares – generally more than 50% of the target firm’s stocks and other assets.
Two businesses participate in an acquisition – the buying company and the target company. The buying company can proceed with the acquisition with or without the target business’s approval, though less amicable transactions are usually dubbed takeovers.
The acquired business gains access to additional capital and expertise that the buying company can provide, whereas the acquirer leverages added resources and technologies.
Common reasons why corporate acquisitions take place are:
In most cases, the target company’s board of directors approves the acquisition, and contracts are crafted to work toward the mutual benefit of both the acquiring and target companies.
Once the target company is acquired by another, it legally ceases to exist. However, the acquisition does not necessarily equal the disappearance of the target company; rather, acquisition permeates the questions of branding, incorporation, and taxes.
Upon acquiring assets of another company, the buying firm has the decision-making power over and can use the newly acquired assets without the permission of the target company’s shareholders. As a result, the acquired business’s stocks become the buyer’s and, therefore, cease to exist under the target company’s name.
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There are five major types of acquisitions: consolidating, value-creating, accelerating, speculating, and resource-acquiring.
Consolidating acquisition is when an acquiring company purchases another company to decrease its competition.
An example of a consolidating acquisition would be a purchase between two tire manufacturing companies operating in the same market.
A value-creating acquisition is a transaction where the purchasing entity aims to profit by enhancing the acquired company’s performance and later selling it to another company.
An example of a value-creating acquisition would be a purchase between two tire manufacturing companies, with the buyer company trying to boost the other’s profits and upsell it to another buyer.
An accelerating acquisition refers to a bigger company buying a smaller business to expand the purchased company’s market access.
An example of an accelerating acquisition would be a purchase between larger and smaller tire manufacturing companies.
A speculating acquisition is an instance of a larger entity purchasing a smaller business to leverage the acquired company’s potential growth.
An example of a consolidating acquisition would be a purchase between two tire manufacturing companies, of which one develops a prospective technology, such as an innovative tire thread or unique rubber compound.
A resource-acquiring acquisition involves a company buying another company to access the acquired company’s resources such as intellectual property, skills, personnel, or market access to save money and time.
An example of a resource-acquiring acquisition would be a purchase between two tire manufacturing companies, of which one develops an innovative tire solution.
The Walt Disney Company has made over 20 acquisitions, spending over $89.21B. The two most significant acquisitions happened in 2006 when Disney acquired Pixar for $7.4 billion, and in 2009, the company acquired Marvel for $4 billion. Other notable acquisitions by Disney were Lucasfilm and 21st Century Fox.
In 2005, Google acquired, at the time, an unknown mobile startup Android for around $50 million. The acquisition enabled Google to compete in the phone market against Microsoft and Apple.
Google’s and Android’s joined forces signified redefining the Internet and gave a renewed description of the World Wide Web.
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