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.