A merger and an acquisition both involve the consolidation of business entities, resulting in a restructuring of their corporate framework to enhance efficiency and competitiveness. Despite their shared goal of achieving synergies, there are distinct differences between merger and acquisition in terms of initiation, process, and outcomes.
What is Merger?
A merger occurs when separate organizations decide to combine forces, forming a new business entity. This decision is typically mutual, with the merged entity adopting a new name, ownership, and management structure that incorporates employees from both merging companies. Mergers often aim to expand market share, enter new markets, reduce operating costs, increase revenues, and broaden profit margins. In this process, there is no exchange of cash, and the merged company issues new shares distributed proportionately among existing shareholders.
For instance, the British multinational enterprise GlaxoSmithKline emerged from the merger of pharmaceutical companies Glaxo Wellcome and SmithKline Beecham in 2000.
What is Acquisition?
An acquisition involves one organization acquiring another, requiring the purchase of at least 51% of the target company’s stock for absolute control. Acquisitions typically involve a financially stronger entity taking over a smaller, comparatively weaker one. Unlike mergers, acquisitions may not be mutually agreed upon, and in some cases, they can occur as hostile takeovers. The acquired company usually continues operations under the name of the acquiring company, which may retain or lay off the acquired company’s staff. There is no issuance of new shares in acquisitions.
For example, in 2017, Amazon acquired the American supermarket chain Whole Foods Inc. for $13.7 billion, with Whole Foods still operating under its original name but controlled by Amazon.
Key Differences Between Merger And Acquisition
Following are the key differences of Merger and Acquisition
1. Procedure
Merger: Mergers involve the creation of a new business entity.
Acquisition: Acquisitions involve one company taking over another.
2. Mutual Decision
Merger: Mergers requiring mutual consent
Acquisition: Acquisitions potentially occurring without the target company’s agreement, leading to hostile takeovers.
3. Company Name
Merger: Merged entities operating under a new name.
Acquisition: Acquired companies usually operate under the acquiring company’s name.
4. Comparative Stature
Merger: mergers involved parties are of similar size,
Acquisitions: In acquisition the acquiring company is larger and financially stronger.
5. Power Dynamics
Merger: Mergers involve a dilution of power between companies.
Acquisition: Acquisitions give the acquiring company absolute power.
In the dynamic landscape of today’s business world, companies are constantly seeking innovative strategies to enhance their competitiveness and sustain growth. One such strategic move that has gained prominence in recent years is the merger and acquisition (M&A) process. While M&A activities are often complex and entail significant risks, when executed successfully, they can yield a plethora of benefits for the involved entities. In this blog, we will delve into the advantages of mergers and acquisitions, shedding light on how these strategic moves can be a catalyst for organizational success.
Mergers and Acquisitions Benefits
Discover the top ten advantages of mergers and acquisitions that can significantly impact businesses:
1. Economies of Scale
The ultimate objective of many mergers and acquisitions is to unlock economic gains and capitalize on economies of scale. This synergy occurs when the combined strength, productivity, and efficiency of the two merging firms surpass their individual capacities. This consolidation brings about benefits such as increased access to capital, heightened bargaining power in the market, reduced costs resulting from large-scale production, and more.
2. Economies of Scope
Mergers and acquisitions also confer the advantage of economies of scope, which involves reducing the production cost of one product through the production of another related product. Essentially, one product complements another, leading to an overall cost reduction. Economies of scope are often achievable through mergers and acquisitions in ways that may be impractical through organic growth alone.
3. Securing a Competitive Edge in the Market
The financial fortitude gained through mergers and acquisitions provides both companies involved with a competitive advantage. This increased economic power translates into a higher market share, greater influence over customers, and a diminished competitive threat. Larger companies, as a rule, pose tougher competition in most industries.
4. Access to Premier Talent
Talent acquisition is a paramount concern for companies aspiring to excel in the market. Recognizing that skilled employees are drawn to well-established brands, larger companies, as a result of mergers and acquisitions, enjoy superior access to the best available talent. This phenomenon is observable across diverse industries, spanning manufacturing, technology, and services.
5. Enhancing Access to Resources
Through mergers and acquisitions, businesses operating in the same sector can enhance access to essential materials, suppliers, and tangible resources. For instance, a business might strategically acquire or merge with one of its suppliers, thereby optimizing production cycles and ensuring reliable access to critical materials.
6. Risk Diversification via Portfolio Variation
Mergers and acquisitions offer companies the opportunity to diversify risk by spreading it across different revenue streams, encompassing varied products, services, and business prospects. Through this diversification, if one revenue stream faces challenges, the business can rely on other income sources to sustain its operations. Effectively managing risk diversification ensures long-term sustainability for the company.
7. Cost-Efficient Facility Solutions
Mergers and acquisitions provide a cost-effective alternative to starting from scratch. Establishing production centers, procuring machinery, constructing storage facilities, and initiating distribution channels incur substantial costs. Merging with a company already equipped with the necessary facilities proves more economical. Additionally, such transactions bring other merger and acquisition benefits, contributing to overall business success.
8. Expansion into New Markets
Venturing into a new market poses challenges, even for established businesses. While creating a subsidiary or branch is an option, mergers or acquisitions offer a more time, cost, and effort-efficient solution compared to building from the ground up. This is especially true for companies aiming to enter foreign markets, where the complexities of international penetration make merging with or acquiring an established local business a more feasible and practical option.
9. Opportunistic Value Creation
Large organizations often seek acquisition opportunities where the purchase price is less than the fair market value of the target’s net assets. This financial positioning suggests that the target company may be facing financial challenges. In such instances, a merger or acquisition can help the acquired company stay afloat, while the acquiring company gains advantages such as proprietary rights to products, increased market growth, entry into new geographic regions, and more.
10. Ensuring Business Continuity
Some small businesses, particularly family or privately-owned, face the risk of business failure when the founder retires, lacking a clear succession plan. This situation can lead to job losses and impact business suppliers. Mergers or acquisitions provide a strategic avenue to ensure business continuity, mitigate operational interruptions, and offer job security to employees.
Conclusion
Undoubtedly, the benefits of mergers and acquisitions service are evident. However, for businesses to sustain the positive outcomes of such pursuits, the implementation of a tailored mergers and acquisitions strategy is crucial, aligned with the company’s unique circumstances and goals. Successful post-merger integration is equally essential, forming the bedrock for capturing synergies, fostering profitable growth, and optimizing deal valuation.
While the potential advantages are compelling, navigating the intricacies of mergers and acquisitions can be intricate. Connect with FundTQ to delve deeper into mergers and acquisitions, exploring tailored options for your business.
Banking has undergone significant transformations in the last five years, with technology playing a pivotal role in accelerating the pace of deals. As outlined in a report from PwC, completing integrations at a faster rate than a company’s standard operations has proven to enhance success in attaining strategic, financial, and operational objectives.
As technology revolutionizes the landscape of managing intricate transactions, a divide emerges between transaction advisors who adapt swiftly and those who lag behind. Traditional advisors grapple with the challenge of keeping pace, relying on established relationships and experience to stay competitive. However, this reliance is insufficient in the face of the accelerating changes brought about by automation.
With the integration of automation, the diligence process sees a remarkable 50% reduction in time. This transformation enables junior bankers to allocate less time to mundane tasks such as creating pitchbooks, monitoring non-disclosure agreements (NDAs), preparing confidential information memorandums (CIMs), and responding to diligence requests. Automation empowers bankers to redirect their efforts toward value-added activities.
For traditional advisors, burdened by clunky management processes and reliance on outdated Excel sheets, progress becomes akin to moving with cement shoes. Their exerted energy proves futile as the modern M&A transaction advisor, embracing technology, not only safeguards deals but also propels forward at a rapid pace.
The contemporary M&A business advisor distinguishes themselves through a centralized process and transparent practices that enhance the client experience. By merging established relationships with robust automation, they excel in making critical decisions. In contrast, outdated advisors hinder their own progress by adhering to data room information that falls short. While they cling to basic analytics, the modern advisor surges ahead.
Modern M&A transaction advisors leverage predictive analytics to anticipate buyer concerns and prepare for meetings, proactively addressing potential issues. They craft engaging diligence experiences for buyers, swiftly identifying risks. Traditional advisors, on the other hand, risk losing deals as they wait for buyers to uncover risks themselves.
As the traditional advisor painstakingly approaches the finish line, the modern advisor has already facilitated a seamless transition. Their buyer utilizes diligence data for post-closing activities and integration. The modern advisor’s approach enables buyers to plan for integration from the outset, reusing diligence data for cost and time savings. Ensuring post-closing success with a seamless handoff becomes a hallmark of their process.
While the traditional transaction advisor may complete the race, their depleted energy leaves them unable to consider the company’s success post-close. In contrast, the modern advisor positions their buyer for sustained success.
