Mergers and acquisitions are terms often used in the same breath, even to the point where we abbreviate them as M&A. However, while they both refer to the joining of two companies together, they are very different concepts.
Here, we’ll go over the differences between mergers and acquisitions and why you might opt for one or the other.
The Main Difference Between Mergers and Acquisitions
The primary difference between mergers and acquisitions is that a merger is the combining of two organizations into an entirely new entity, while an acquisition is when a company absorbs another, but no new organization is created.
For instance, if two companies agree to merge and create a new legal entity, that would be a merger. On the other hand, if one company buys out another and absorbs it into itself without changing its own identity, that would be an acquisition.
As stated, a merger occurs when two organizations combine to create an entirely new entity. Each party holds a share of the ownership of the new company, and the two previous organizations are dissolved. A new management structure is created, and it functions as an entirely new company.
Typically, mergers are friendlier than acquisitions. Both parties agree to combine together, and they both stand to benefit from the agreement.
Negotiating a Merger
In a merger, negotiations primarily center around how much of a share each entity has in the new organization. New shares are issued by the company and distributed proportionally between the parent companies. In most cases, mergers don’t involve any cash.
Common Reasons to Merge
Companies that decide to merge often do so in order to expand their reach to new markets, reduce operational costs, and improve profits. Each parent company may benefit from the operational capacity and reach of the other, even if it means sacrificing some individual power to do so.
Acquisitions tend to be more hostile than mergers since there is usually a high imbalance in power. They are also more common since it’s fairly rare for two companies of roughly equal standing to consent to merging. Often, acquisitions are called mergers purely to avoid a negative connotation.
Negotiating an Acquisition
In an acquisition, one company buys the other. As such, the negotiations center around the purchase price, and they often require high amounts of cash.
Common Reasons for an Acquisition
Acquisitions may occur when a company wishes to expand their product offerings, lower their operational costs, eliminate the expenses of buying from a supplier, or acquire important assets that would otherwise require extensive time and development to implement.
Carrying Out M&A Successfully
Both mergers and acquisitions can be lengthy and complex, with extended negotiations, comprehensive due diligence, and high costs. Legal costs are a particular concern since the purchase agreement needs to be tightly developed in order to secure the best interests of the parties involved.
It’s vital to make sure your organization’s best interests are represented in the course of an M&A deal. As such, you need an attorney on your side. Hart David Carson LLP can represent you and advise you on the legal ramifications of acquiring or merging with another company. For a consultation, contact us today.