Difference Between Merger and Acquisition

Merger and Acquisition are two terms that are frequently used in the corporate and banking sectors. These two terms hold prominence in this domain. The merger and Acquisition (M&A) technique is used for the consolidation of companies or their prominent business assets via financial transactions between companies.

What Do You Understand by Merger?

When two or more individual companies or enterprise entities consolidate to create a new enterprise, then it is called a merger. A newly formed merged entity is owed with a new name, and usually, it also leads to the creation of a new management system. It also witnesses changes in ownership. The new management system is created by pooling down workforce and resources from both entities. The decision to merge their companies is mutually taken, even at the cost of disregarding their respective influence and power. Mergers usually take place to combine their resources to attain certain objectives and gain benefits. The merger of companies is devoid of cash.

The prime motive behind such mergers is usually capturing market share, enhancing purchasing power, boosting revenues, curbing operational costs, widening profit margins, and making inroads into new markets. The stakeholders generally who participate in the merger concede to similar terms that are acceptable to all stakeholders. Parties who have merged their entities treat themselves as equal.

When a company undergoes a merger, new shares are typically issued as part of the merger process. These new shares are then distributed proportionately among the existing shareholders of both parent companies involved in the merger. This distribution ensures that each shareholder maintains a proportional ownership stake in the merged entity relative to their holdings in the original companies.

For example, GlaxoSmithKline, a British multinational enterprise, was created in 2000 by merging two pharmaceutical companies, SmithKline Beecham and Glaxo Wellcome.

What is an Acquisition?

Acquisition occurs when a company buys the shares of another company with the motive of controlling it. In other words, it is an act of a company taking over or securing another company's interests. The acquisition is also sometimes known as a takeover and often carries a negative connotation relative to the merger.

Acquisition can take place by acquiring assets of that company or purchasing shares or stock of the company. If the company gains more than 50% of the share of the other company, it gives the company room to make decisions for other companies. After the acquisition, the company takes control over the operational management decisions of another company. Unlike mergers, acquisitions involve massive cash, and buyers have the upper hand in the matter of acquisition.

Acquisition of Time Warner by AT&T: As stated by its website, AT&T Inc. acquired Time Warner Inc. However, due to intervention from the US administration, the deal got stuck and landed in a legal dispute. However, the court set aside legal hurdles and cleared the path for AT&T's takeover of Time Warner Inc.

Purpose Behind Merger and Acquisition (M&A)

There are lots of reasons that push corporates and banking entities to adopt the Merger and Acquisition technique. Some of them are listed below:

• Capturing, Consolidating, and Concentrating Market Power: Merger and Acquisition (M&A) techniques are adopted to effectively neutralize competitors, broaden their customer share, and allow access to new technologies or resources. They also ensure company competitiveness and help companies scale up their operations.
• Synergy creation: This M&A technique might create an incentive for the acquirer by making an important worth driver called Synergies. A prime objective behind Merger and Acquisitions is to collaborate between them as it would create a combined worth which is will be more than their worth. Synergy creation can be revenue synergies or cost synergies.
  Revenue creation can be understood as a strategy where the sale of a product or service is increased by bundling it with another complementary product or service. Cost synergies are mentioned in the cost-saving bullet point. The majority of the transactions cite this reason as a prime motive. One of the high-profile examples that adopted the M&A technique to leverage synergy creation is the merger of Exxon and Mobil back in 1998.
• Strategic Alliances and Partnerships: Mergers and Techniques allow newly formed entities to leverage their complementary strengths, expertise, and resources.
• Diversification: M&A techniques enable enterprises or companies to diversify their services or product offerings and lower their reliance on a single industry or market. This reason is also considered to be the driving force behind adopting the Merger and Acquisition technique. Apart from product or diversification, it also diversifies revenue flows that lower their risk. Nestle is a good example of diversifying through the Merger and acquisition technique.
• Cost Savings: Merging operations often translates into cost savings through economies of scale, streamlining the process, and curbing duplication of efforts. Having one HR would be beneficial instead of having two. Airlines' mergers are classic examples of cost savings, as massive costs are incurred at every phase of their value chain, for example, customer service, ground staff, and baggage holders. The merger of US Airways and American Airlines aided in saving an estimated $150 million in costs per year.
• Talent Acquisition: Rival companies tend to acquire small companies as they have few highly skilled individuals in their organization, which might have attracted the rival company. However, this is not a common driving force, but it exists. Meta, formerly Facebook, has acquired a chain of entities just with the prime objective of acquiring their talent pool.
• Vertical Integration: Vertical is a move by the objective of acquiring downstream or upstream operations, and keeping control over the supply chain. IKEA, a furniture maker company, acquired Romanian forests in 2015, supplying them with the raw materials to make flatback chairs, beds, and tables.
• Brand Strengthening: Acquiring a popular brand boosts its value and even brings customer loyalty and reputation. LVMH, the French company, is an open example of a company that acquired multiple luxurious brands with the purpose of forming an unrivaled portfolio that includes everything from accessories and shoes to haute couture and perfumes.
• Access to Critical and Emerging Technologies: M&A allows conglomerates access to critical, innovative, and emerging technologies, boosting Research and Development capabilities that they do not have at their disposal. Disney's acquiring Pixar in 2006 can be quoted as a good example, as it was pursued by multiple factors for acquisition. One motive was to control Pixar, then revolutionary animation technology.
• Access to Licensing or Distribution: The acquisition of the company aids in accessing control of distribution channels, which includes relationships with the warehouse, vendor, and even retail. Another element of the acquisition of a company involves acquiring a foreign company to acquire a license to give service or produce in the interior of the country. Vodafone's acquisition of Telcim, Turkey's second-biggest mobile operator, in 2005 is a textbook example.

Difference Between Merger and Acquisition

Mergers and Acquisition are two widely used in the corporate sphere. These techniques help in consolidating the position of the company and enlarging the company's operation and efficiency. At first instance, Merger and Acquisition, appear may look like, but it has significant differences exist between them. Some of the differences are given below:

Conclusion

Merger and Acquisition (M&A) is a rewarding technique, but it requires a complex process. This technique could become a game changer for an entity seeking to diversify, have a competitive edge, grow, and be resilient. Achieve massive tangible success, required meticulous planning, background fixation, intense groundwork, and effective execution.

Potential benefits that lure companies to adopt M&A are expanded market presence, synergies in operations, increased economies of scale, access to new technologies or markets, and enhanced shareholder value. But with these benefits, this technique can also bring regulatory issues, integration resistance, cultural clashes, and unpleasant financial consequences.

Those entities that have been successful in M&A had a clear and well-defined objective, careful evaluation of potential targets, solid merger-acquisition plant and potential implications, and contingency plans in case of failure. Companies must give special attention to maintaining employee morale, protecting the organization's core values, and focusing on customer satisfaction. These points ensure long-term sustainability and profitability.

M&A requires proper navigation and commitment to overcome risk. It can help potential organizations to unlock their significant value and push toward success.