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What is the difference between Mergers or Acquisitions? Explained
Financial Modeling Guides, Investment Banking Jobs & Interviews, Technical & Research
Author: Sarthak Bhalerao
What is a Merger?
What is an Acquisition?
Key differences between Merger and Acquisitions
When two or more individual businesses consolidate to form a new enterprise, it is known as a merger. This merged entity usually takes on a new name, ownership, and management that comprises employees from both companies. The decision for mergers is always mutual. Both the involving parties seek some sort of benefit out of this merger. 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 of the merger 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.
An acquisition entails one organization acquiring the business of another organization. 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 entity. It is not necessary for the decision to be a mutual one. Acquisitions are also termed hostile takeovers. 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.
In 2017, Amazon acquired the American supermarket chain Whole Foods Inc. for $13.7 billion. Whole foods still operate in its original name and are 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 prominent differences between the two are given below:
Merger Acquisition
Procedure Two or more individual companies joint to for from a new business entity. One Company completely takes over the operations of another
Mutual Decision A merger is agreed upon by mutual consent of the involved parties The decision of acquisition might not be mutual
Name of the Company The merged entity operated under a new name The acquired company mostly operates under the same name as the parent company. In some cases, the former can retain its original name if the parent company allows it.
Comparative Status The parties involved in a merger are of similar stature, size, and scale of operations. The acquiring company is larger and financially strong than the target company.
Power There is a dilution of power between the involved companies. The acquiring company exerts absolute power over the acquired one
Shares The merged company issues new shares New shares are not issued.
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