Companies have been using mergers and acquisitions (M&A) as strategies to enhance their growth, increase their power in the market, or enter into new markets altogether. However, even though both these terms are often used interchangeably they each have their own meanings and require companies to follow different processes when entering into them.
The meanings behind these terms can be gleaned from their names though as mergers involve two companies combining into one, whereas in acquisitions one company is buying another. These practices have had an influence in various industries all over the world, which is why it’s become important for not only executives to know the main differences and similarities between them but also investors and the public at large. That’s why we’ll be exploring these below.
Similarities Between Mergers and Acquisitions
There’s a reason why mergers and acquisitions are often mistaken for each other. They share some similarities. Let’s see what they are:
Goal of Business Expansion
In both mergers and acquisitions, the main goal is to accelerate growth, which is why companies that want to enter into them need to find trusted firms in this sphere with years of experience. That’s because a firm of this caliber can help companies grow by ensuring that they can gain a competitive advantage by gaining a larger market share, being able to diversify their product portfolios, or getting access to proprietary knowledge or technologies.
Complex Negotiations
Another similarity that mergers and acquisitions share is that they both involve a lot of negotiations. What makes their negotiations longer and more complex is that companies’ value needs to be evaluated, debt assumptions have to be made, and new ownership structures need to be erected.
When doing this all parties’ financial advisors and legal teams need to delicately form agreements that will protect their clients’ interests. This then results in a back and forth between various entities that usually makes M&A deals take months or even years to reach consensus like the AT&T and Time Warner merger that took almost two years to finalize.
Focus on Value Creation
One of the things that M&A deals always have the potential to provide is the creation of more value for all stakeholders. This value can be created by pooling resources, technologies, and talent from various companies so they can improve their operational efficiency, lower costs for consumers, and maximize profits.
We’ve seen this in the Kraft and Heinz merger which helped both these food industry giants to reduce their costs, make crucial changes to their brand, and increase their market leverage. That’s why investors usually expect M&A agreements to increase returns in the companies involved which in turn can drive stock prices higher.
Impact on Employees and Management
Regardless of whether it’s a merger or acquisition, there’s one thing that’s inevitable. There will be big changes in leadership and personnel. That’s why when companies go through an M&A process employees usually worry about potential layoffs, possibly having to relocate, or experiencing a change in roles.
However, it’s not only employees who get affected by uncertainty as executives may also see management structures shift as challenges may arise from varying operational priorities and differences in corporate cultures.
Regulatory Approvals Are Necessary
M&A deals are also similar in that they are all expected to comply with antitrust regulations and heavy governmental oversight. The reason behind this is to make sure that these deals don’t end up facilitating monopolistic behaviors so competition in markets can remain fair.
This is why getting regulatory clearances is often harder to get in bigger M&A transactions such as the unsuccessful General Electric and Honeywell merger. What stopped it from proceeding is that European regulators blocked it citing competition concerns.
Differences Between Mergers and Acquisitions
Even though both mergers and acquisitions are similar in many ways they are also very different from each other in some aspects. Let’s see what these are:
Nature of the Transaction
First off, what makes these deals differ from each other as we’ve touched on a bit is how they combine companies as mergers involve two companies who mutually decide to join so they can become a new organization. Acquisitions on the other hand involve one company buying another business so it can gain control of its operations and leadership.
A great example of the latter is how Facebook acquired Instagram. That’s because when this happened Facebook didn’t even change Instagram’s branding, instead, they just integrated the social media platform’s resources and leadership under their control.
Power Dynamics
These deals also differ in power dynamics as mergers are usually carried out by two companies of a similar size who want to partner up so they can share resources and power equally. An example of this is the merger that Daimler-Benz and Chrysler went into which was supposed to be a balanced partnership but broke up due to cultural clashes that caused challenges.
On the flipside acquisitions are usually prompted by bigger or more dominant companies who want to take over smaller firms, resulting in a more hierarchical business structure should the deal go through.
Financial Structure
There are huge differences in the financial arrangements in these deals too as mergers usually result in a stock-for-stock setup to create a new company with mixed equity. Acquisitions though are usually outright cash payments for companies like the $26.2 billion all-cash payout Microsoft forked out when acquiring LinkedIn.
However, acquisitions can also entail stock purchases or a mix of both depending on how the company that wants to buy the other wishes to finance the deal.
Motivation Behind the Deal
Lastly, what creates a difference between mergers and acquisitions is the motive behind the deal as mergers are usually entered into by two complementary businesses who want to capitalize on their synergy. An example of this would be two companies in the tech sector who might want to merge so they can integrate their products into one offering.
Even though acquisitions can be made for similar reasons, most of the time they are driven by competitive motives like acquiring a rival to eliminate competition or to access untapped markets.
Conclusion
Mergers and acquisitions can be great tools that businesses can use to transform and grow which is why understanding the similarities and differences between them is crucial for navigating their complexities. Despite that, what has been made clear is that they both require careful planning, strategic foresight, and leaders to ensure that their cultures are aligned so they can succeed.
