Understanding the difference of Mergers and Acquisitions
Maybe you've been following the latest business news and seen the terms 'merger' and 'acquisition' thrown around a lot recently.But do you really understand the difference between these two types of business deals? Mergers and acquisitions, also known as M&A's, refer to the consolidation of companies, but they impact companies in very different ways. If you've ever wondered why some companies combine forces while others get gobbled up entirely, you've come to the right place. We're going to break down mergers vs acquisitions so you have a clear understanding of how each business deal works and why companies pursue them. By the end of this article, you'll be an M&A expert and the go-to person to explain the difference between mergers and acquisitions to your friends.
Defining Mergers and Acquisitions
Mergers and acquisitions (M&A) are two different types of business deals that involve combining companies in some way.
A merger refers to two companies agreeing to combine into a single new company. Typically, mergers are viewed as more or less equal "marriages" of the companies. The companies' shareholders often exchange their shares for shares in the new combined entity. Mergers usually happen when companies in the same industry see benefits from combining forces, like gaining market share, reducing costs, or improving profitability.
In an acquisition, one company buys another company. The acquiring company obtains a controlling interest in the acquired firm, meaning it has more than 50% ownership. Acquisitions are often viewed as a larger, more powerful company taking over a smaller or weaker one. The acquired company ceases to exist as an independent entity.
While the end result of mergers and acquisitions is essentially the same - two companies becoming one - how they happen and the level of equality between companies are quite different. Both types of deals can have a major impact, changing the competitive landscape, influencing the economy, and changing how companies operate.
Key Differences Between Mergers and Acquisitions
When companies join forces, it's typically categorized as either a merger or an acquisition. While the end result may seem the same, there are some key differences in how they actually happen:
With a merger, two companies come together as equals to integrate into a new combined entity. Both companies are blended together, so there's a mixing of leadership, staff, resources, and processes. Think of it like a marriage.
In an acquisition, one company purchases another and takes control of its assets, leadership, and operations. The acquired company ceases to exist as a separate entity. This is more like an adoption, where the acquiring company gets a new dependent.
In a merger of equals, ownership of the new company is split between the merging companies' shareholders. An acquisition results in the purchasing company owning 100% of the acquired company's shares.
Following a merger, a new name and brand are often created to represent the combined company. Acquisitions usually result in the acquired company adopting the acquirer's name and brand. Sometimes the acquired brand is retained as a subsidiary, but the parent company is still in control.
While the end result of companies coming together may be the same, the process and implications can be quite different. The distinctions between mergers and acquisitions are important to understand for shareholders, employees, and customers. With open communication, thorough planning, and the right integration strategy, either approach can be a win-win.
Motivations for Pursuing a Merger or Acquisition
There are several reasons why companies pursue mergers and acquisitions (M&A). For the acquiring company, the motivations typically come down to growth, expansion into new markets or geographies, gaining new technology or products, or achieving greater efficiency.
For growth, a company may acquire another in the same industry to gain a larger market share, more customers, enhanced brand recognition, and increased revenue and profits. Expanding into new markets or territories is also appealing, acquiring an established company in a region the acquirer wants to enter.
Gaining valuable technology, intellectual property, or products is a strong motivator. It's often easier to obtain these through acquiring a company that already has them rather than developing them internally. The acquirer instantly gains knowledge, expertise, and resources that would otherwise take years to build.
Greater efficiency is another motivation. By combining operations, the merged company can cut costs through economies of scale and synergies. Eliminating duplicate functions and consolidating processes can significantly reduce expenses. The acquirer also gains the target's assets, resources, and specialized skills.
For the target company, motivations center around gaining resources, financial stability, and rewarding shareholders or owners. Lacking the means to grow on their own, merging with or being acquired by a larger company provides resources, funding, and new opportunities for the target to continue operations and expand. Selling the company also provides shareholders and owners a return on their investment and a chance to exit.
In summary, the motivations behind M&A are often strategic and financial. Growth, expansion, gaining resources or technology, and achieving greater efficiency are common reasons for the acquirer. For the target, key motivations are gaining resources to continue operating, ensuring financial stability, and providing shareholders an exit and return. But in the end, the success of any deal comes down to thorough due diligence and post-merger integration to realize the expected benefits.
The Merger and Acquisition Process Step-by-Step
The process of merging with or acquiring another company follows some standard steps. As with any big milestone, it's normal to feel a mix of emotions. But by understanding what's involved, you can feel more at ease with what's to come.
Doing your homework
First, spend time researching and evaluating potential companies that could be a good match. Analyze their financials, assets, market share, and company culture to determine if combining forces could be mutually beneficial. If things look promising, it's time to make initial contact.
Signing a non-disclosure agreement
Before sharing sensitive details about your company, both parties sign a non-disclosure agreement (NDA) to keep conversations confidential. This allows for open communication without fear of information leaks.
Conducting due diligence
During this step, you'll gain a deeper understanding of the inner workings of the other business. You'll review contracts, financial records, inventory, employee data, and more. The goal is to uncover any red flags or potential deal breakers before proceeding to the next phases.
Valuing the companies
With due diligence complete, each company is valued to determine an equitable distribution of shares in the new combined entity. There are several methods used to determine a company's worth, including evaluating its assets, market position, and future growth potential.
Negotiating the deal
If valuations and other assessments are agreeable, it's time to negotiate the terms of the agreement. Things like the exchange of shares, employee retention, leadership roles, branding, and timelines are discussed before drafting the legal contracts.
Signing the contracts
Once negotiations are finalized, the involved parties sign the binding contracts to make the merger or acquisition official. This typically includes a purchase agreement outlining all details and terms as well as non-compete clauses, employment agreements, and more.
Integrating the companies
The real work begins by combining facilities, staff, systems, and processes. Leadership from both sides must collaborate to ensure a smooth transition to a newly integrated company. With open communication and patience, mergers and acquisitions can be a win-win.
Challenges and Keys to Success in Mergers and Acquisitions Deals
Mergers and acquisitions can be complicated, with many challenges to navigate to reach a successful deal. Some of the biggest hurdles include:
Integrating company cultures
Company culture encompasses many things, like values, work styles, and unwritten rules. Blending the cultures of two previously separate organizations can be tricky. Make sure leadership addresses cultural differences head-on by communicating a shared vision and set of values for the new combined company.
Retaining key talent
During the uncertainty of an M&A, employees may seek job opportunities elsewhere. Provide incentives for important staff members to stay, through promotions, raises, or other benefits. Reassure employees about their job security and future with the new organization.
Achieving cost savings
A primary goal of many M&As is to cut costs through synergies like reducing redundant roles or departments. However, cutting too deeply can damage the new company's effectiveness or ability to innovate. Find the right balance of cost savings and investment in new growth opportunities.
Managing operational challenges
Bringing together IT systems, supply chains, facilities, and more creates logistical difficulties. Plan the integration of operations carefully to minimize disruptions. Provide employees with the training and resources they need to navigate changes.
The keys to success are strong leadership and communication, thoughtful planning, and balancing cost-cutting with new investments. When M&As are well-executed, the end result is a company greater than the sum of its parts. But without overcoming the significant challenges, deals can fail to ever realize their full potential.
Real life examples on Mergers and Acquisitions
Some well-known examples of mergers and acquisitions include:
Disney's acquisition of 21st Century Fox
In 2019, Disney completed its $71.3 billion acquisition of 21st Century Fox, gaining valuable assets like the X-Men and Fantastic Four franchises, as well as a controlling stake in Hulu. This massive deal reshaped the media landscape and solidified Disney as a dominant force in entertainment.
Amazon's purchase of Whole Foods
In 2017, Amazon shook up the grocery industry by acquiring the organic grocer Whole Foods for $13.7 billion. The deal gave Amazon a foothold in the $800 billion grocery sector and expanded Whole Foods' reach through Amazon's delivery and logistics network. For customers, it meant lower prices on certain goods and the option to buy Whole Foods groceries through Amazon.
T-Mobile and Sprint merger
In 2020, T-Mobile and Sprint officially combined in a $26 billion all-stock deal, reducing the number of major wireless carriers in the U.S. from four to three. The merger aims to improve 5G deployment and compete with AT&T and Verizon. However, critics argue it could lead to higher cellphone plan prices and job losses. The deal was originally announced in 2018 but faced regulatory hurdles before finally closing two years later.
Google's purchase of YouTube
In 2006, Google made one of its most significant acquisitions, purchasing the video sharing platform YouTube for $1.65 billion in stock. At the time, YouTube was less than two years old but growing rapidly. The deal proved transformative for Google, securing its place as the dominant player in online video and opening up new opportunities for advertising and streaming media. YouTube has become a pillar of Google's business and an influential force in entertainment, news, and more.
These major company mergers and takeovers are prime examples of how M&A activity can significantly impact industries, competitors, customers, and communities. For better or worse, mergers and acquisitions have the potential to reshape how business is done and how services are provided.
So there you have it. Mergers and acquisitions may seem similar on the surface, but they involve very different strategies and processes. Mergers aim to combine companies to benefit from increased efficiencies and market power. Acquisitions are more like takeovers, where one company purchases another to gain control. While mergers are collaborative, acquisitions are more competitive.
The key is understanding what each type of deal really means for the companies involved and how they can impact employees, customers, and communities. Do your research and ask questions to determine whether a merger or acquisition aligns with your priorities and values. These business deals happen every day, so make sure you go in with eyes open to the differences and how each one could change the trajectory of your organization. Knowledge is power, so get informed and stay engaged in the process. Before you know it, you'll be an expert in distinguishing mergers from acquisitions yourself!