A lot of people use the terms ‘mergers’ and ‘acquisitions’ together, as if they are one and the same thing. This is also because they are often referred to together, with expert companies offering merger and acquisition services. However, there are actually significant differences between the two, not in the least in how they are financed.
Understanding Mergers and Acquisitions
In both mergers and acquisitions, one or several companies purchase all of another company. In a merger, two similar-sized companies agree to join forces, creating a single entity. This is also known as a ‘merger of equals’. Usually, financing of this type of action is done by swapping stocks. This means that the stock each individual company held before is transferred over to the new company, and each party receives the equivalent of what they put in. The new union is then managed by a single administrative section. It is the setting up of this section, which inevitably means that some jobs are lost, that makes most mergers of equals fail.
Acquisitions are very different, as they involve a company that completely takes over a new company. The buyer, in this scenario, becomes the sole owner of the company that is purchased. Legally speaking, the company that was bought will no longer exist, as it is swallowed up by the buying company. The stock will continue to be available for trade. In an acquisition, the two starting companies were unequal, and they then become one. Usually, financing is done through debt combination and cash, stocks, equity and more. Hostile takeovers, which happen quite often, are a type of acquisition.
When two CEOs of different companies agree that, by working together, they can work more, a merger has happened. If the company was happy operating on its own, but gets purchased anyway (for instance by the other company buying all of its stock), then it is an acquisition.
In many cases, one company will set out to try and achieve a merger. This is because it is friendlier and more ethical and simply feels less hostile. While it does mean jobs are lost, this is often done in a way that is mutually agreeable for everybody. With acquisitions, on the other hand, employees are often left feeling as if they were invaded. They often end up losing their job and those who don’t are left with a bitter taste in their mouth.
Both mergers and acquisitions often fail. This is due for a variety of reasons, including the fact that it often makes employees very unhappy. Additionally, one of the two companies is often struggling (this is particularly true in the case of acquisitions) or both of them are (more common in the case of mergers) and this means that the merger or acquisition is a last resort option to survive.
Business is risky regardless, however, which is why so many companies continue to acquire other companies, or merge with them. Do make sure, if you are interested in doing the same, that you seek legal and financial advice.