Malcolm ZoppiSun Oct 29 2023
Understand Mergers and Acquisitions: What is a Merger vs Acquisition?
A merger is the process by which two or more businesses unite to create a new legal entity. An acquisition, on the other hand, occurs when one company purchases another, resulting in the acquired company becoming a part of the acquiring company.
In the world of business, mergers and acquisitions (M&A) are terms that are often used interchangeably. However, they refer to different types of transactions, each with its own unique features and benefits.
A merger is the process by which two or more businesses unite to create a new legal entity. An acquisition, on the other hand, occurs when one company purchases another, resulting in the acquired company becoming a part of the acquiring company. While both mergers and acquisitions involve two or more companies coming together, they differ in significant ways.
For example, mergers may occur when two or more business entities agree to combine their operations to form a new business. Conversely, an acquisition occurs when one company assumes control of another. Acquisitions may be friendly or hostile, while mergers are often known as a merger of equals.
There are many motives for acquisition or merger, including the desire to enter new markets, access new business assets, or create a new business entity. Whatever the reason, it’s important to understand the difference between a merger and an acquisition to determine which type of transaction is right for your business.
- A merger is when two or more businesses come together to establish a new legal structure.
- An acquisition is when one company buys another, integrating the bought company into the purchasing entity.
- Mergers may occur when two or more business entities agree to combine their operations to form a new business.
- Acquisitions may be friendly or hostile, while mergers are often known as a merger of equals.
- The motive for an acquisition or merger may be to enter new markets, access new business assets, or create a new business entity.
Key Differences Between a Merger and an Acquisition
When it comes to business expansion through M&A, there are two primary methods to consider: mergers and acquisitions. While the two terms are often used interchangeably, they are in fact unique approaches to combining businesses. In simple terms, a merger occurs when two or more companies agree to combine their business operations and assets to create a new legal entity. On the other hand, an acquisition occurs when one company purchases another company.
A merger can be motivated by the desire to enter a new market or create a new business entity. In a vertical merger, companies in the same industry but at different stages of the supply chain merge to create a streamlined and efficient supply chain. In a horizontal merger, companies in the same industry merge to gain market share and increase their bargaining power with suppliers and customers. A reverse merger, on the other hand, happens when a private company merges with a publicly listed shell company to go public without an initial public offering (IPO).
Acquisitions may be friendly or hostile, with hostile takeovers occurring when the acquiring company makes a bid for the target company without the support of the target’s board of directors. The motive for an acquisition can be to gain access to new markets, products, or technology. Acquisitions may also enable a private company to become publicly traded. With an acquisition, the acquiring company takes over another company and absorbs its business operations and assets, while the acquired company becomes a part of the acquiring company.
One key difference between a merger and an acquisition is that a merger requires two or more companies to come together and form a new legal entity, while an acquisition occurs when one company purchases another company. Another difference is that in a merger, the two companies are on equal footing, whereas in an acquisition, the acquiring company is usually larger and more powerful than the company being acquired. You can consult a corporate lawyer to become more familiar with the process.
Differences Between the Two
There are also several other differences between mergers and acquisitions. For example, in a merger, both companies’ shareholders become shareholders in the new entity, while in an acquisition, the target company’s shareholders may or may not become shareholders in the acquiring company. Additionally, in a merger, new shares are issued for the new legal entity, while in an acquisition, existing shares in the acquiring company may be used to pay for the acquired company.
It’s important to note that a merger or an acquisition can be a complex and often lengthy process that involves business valuation, negotiation, legal and regulatory compliance, among other considerations. Seek advice from an M&A lawyer before you begin with the process.
What sets a merger apart from an acquisition?
A merger involves the combination of two or more companies to form a new legal entity, while an acquisition occurs when one company purchases another company, making it a part of the acquiring company.
How do mergers and acquisitions differ in terms of the way the companies come together?
In a merger, two or more companies agree to combine their business operations and assets to create a new entity. On the other hand, an acquisition can be achieved through various methods, such as taking over another company or absorbing its operations.
Can you provide examples of different types of mergers and acquisitions?
Sure. A horizontal merger involves the combination of two companies operating in the same industry, while a vertical merger occurs between companies at different stages of the supply chain. Additionally, a reverse merger involves a privately owned company merging with a publicly listed shell company.
What are some motives for companies to pursue mergers or acquisitions?
Some common motives include entering new markets, forming synergies between entities, expanding business operations, and gaining access to new assets or technologies.
Are all mergers and acquisitions friendly?
No, not all mergers and acquisitions are friendly. While some are carried out with mutual consent and collaboration, others can be hostile takeovers, where the acquiring company forcefully acquires the target company against its will.
What role do shareholders play in mergers and acquisitions?
Shareholders of the acquiring company can have a significant impact on mergers and acquisitions, as they may need to approve the transaction and may also become shareholders of the new entity formed through the merger or acquisition.
How do a merger and a takeover differ from each other?
A merger involves the combination of two or more companies to form a new entity, whereas a takeover refers to one company taking control of another company by acquiring a majority stake or ownership.
Find out more!
If you want to read more in this subject area, you might find some of our other blogs interesting:
- What is a Merger Agreement?
- Are Acquisitions Also Mergers?
- M&A Lawyer Hourly Rate
- What is Due Diligence in Law?
- Can a Non-Lawyer draft a contract?
- How to Write a Legally Binding Contract: Expert Guidance for Success
- 5 Things to Include in a Business Purchase Agreement
- Do I Need a Lawyer for Buying a Business?
Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.
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