Docstoc

Understanding Mergers vs. Acquisitions

The terms merger and acquisition are often used interchangeably to describe the joining together of two businesses to create one larger, more efficient and more profitable company. However, the terms are not completely synonymous.

In its most basic definition, a merger occurs when two existing businesses decide to fuse together their current activities to become one bigger, jointly-owned corporation. In this case, a new business is formed with the combined customer base and resources.

An acquisition, however, occurs when one business purchases another business in a corporate takeover. The larger of the two businesses is usually the one to acquire the smaller business, and the brand and corporate identity of the purchasing business does not change.

It is important to thoroughly understand the similarities and differences of these two terms and to become familiar with the financial and legal implications of each action. Let’s review the elements and motivations behind both mergers and acquisitions:

Purpose and Motivation

The biggest similarity between the two activities is the purpose driving these decisions. Both mergers and acquisitions occur to help diversify and grow a business’ current market and operations. By combining the two businesses, the companies can enjoy more customers, higher overall revenue and an increased set of assets.

By pooling resources, companies choose to merge with or acquire others for the purpose of blending existing talents and boosting their overall market share. Companies are often also driven by the tax advantages that larger companies are privy to, or the acquiring business may simply desire to gain an advantage over competitors.

Decision

Although the purpose to combine businesses always boils down to greater growth opportunity, the decisions behind a merger versus an acquisition may be very different.

With a merger, two similarly sized companies usually come to a mutual decision to join forces. The decision will often benefit both companies equally or provide each company with a different but equally beneficial value. For example, one company may have a slightly more prominent brand but was recently hit with some revenue loss and is seeking more financial stability. The other lesser-known but more financially stable company can benefit greatly by becoming a part of a brand with greater reach. A merger between the two would most likely be an agreeable deal.

Acquisitions, on the other hand, can be amicable or, in some cases, more hostile. In a friendly acquisition, both companies are willing to work together and approve of the purchase. Oftentimes, a larger company agrees to acquire a smaller one, which provides the founders and early employees a chance to capitalize on their equity while giving the business a much vaster pool of resources. The larger company can tap into the market of loyal customers of the smaller business and acquire any of the company’s specialized talent and products. This approach may cause some bumps in the road if, for example, not all of the original departments are retained or if customers feel less attached to a larger corporation. But this type of acquisition generally occurs with the permission of the management on both sides.

A hostile acquisition, however, typically means that the owners of the smaller business are not supportive of the takeover. A hostile takeover occurs when the acquiring company purchases a majority of the smaller company’s shares, claiming ownership without a negotiated deal.

For this reason, acquisitions are sometimes called mergers to avoid any negative connotation associated with unfriendly takeovers.

Ownership

Since the companies involved in a merger are usually about the same size, the two will share ownership of the new corporation. This means there is a completely new legal entity with a separate identity from the original companies.

However, in an acquisition, the one larger and dominant company usually purchases the smaller corporation and becomes the owner. The corporate and brand identity of the larger company typically does not change, nor does the ownership. There is simply an additional facet to the business. Owners of the smaller business may be offered management positions in the larger company or positions on the board of directors; however, this is not guaranteed.

Stocks and Shares

In most states, mergers require the approval of a majority of the company’s shareholders on both sides before moving forward. If the merger moves forward, stocks from the original companies are typically surrendered, and new stocks are issued under the new entity.

In an acquisition, the purchasing company buys all the shares of the smaller company. Individuals and employees with options or equity in the smaller company may have their shares purchased off them or be compensated with stock in the larger company. These transitions will vary depending on what was established in the Shareholder’s Agreement beforehand and the terms and conditions established by both companies.

Potential Hazards

There are potential drawbacks with both acquisitions and mergers. The action could potentially dilute earnings within the companies and reduce overall stock value. There is also the chance that there will be repetitive staff and or overlapping operations if the companies are similar. This may mean layoffs, which typically has a negative impact on employee morale.

Large executive turnover is also common surrounding mergers and acquisitions, especially if the deal is not friendly. Mergers and acquisitions can also temporarily affect productivity because the companies lose focus on the company’s daily needs and customers while working through process of integrating.

It’s also possible that the integration fails to open up new markets or alienates customers from the brand they were familiar with. Make sure that you adequately prepare customers for the transition and keep their needs in mind during the process.

When to Act

Both mergers and acquisitions share a need for a clear vision and plan. Because of the numerous potential downsides of mergers and acquisitions, thorough research and planning should be done before deciding to act.

Companies involved in a potential merger or acquisition should carefully plan the deal and be aware of any potential risks it may pose to finances, customers and operations. There should be lots of communication with everyone at the company so that key players are aware and supportive of the change.

For more information on taking action, our “When Is M and A Right for Your Business” article offers guidance and tips on mergers and acquisitions.

 
;