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Merger vs. acquisition: Understanding the key differences
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Merger vs. acquisition: Understanding the key differences

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difference between merger and acquisition

The key difference between merger and acquisition

Dealmakers often opt for mergers and acquisitions (M&A) when searching for growth or restructuring methods. As of H1 2023, there were 27,003 deals globally, according to PwC. Despite a 9% decline year-over-year (YOY), the volumes still demonstrate businesses’ willingness to develop by means of M&A.

However, getting involved in dealmaking, it’s essential to understand the difference between acquisition and merger. This article clarifies the mergers and acquisitions definition and the major differences between them.

What is a merger?

A merger occurs when two or more companies combine their operations to form a new legal entity. This new organization gets a new name, management structure, and ownership, while two previous organizations are dissolved. Companies that merge are usually equal in terms of size and scale of operations.

The main reasons behind a merger are usually companies’ desire to increase revenues, reduce operating costs, enter new markets, or expand the market share. Typically, mergers are friendlier by nature.

Note: Learn how to expand business internationally in our dedicated article.

Merger types

There are 5 main types of mergers:

  • Horizontal

In a horizontal merger, both companies operate in the same industry, offer the same services or products to the same customers, and are direct competitors.

  • Vertical

A vertical merger takes place when two companies operate at different levels of the same supply chain, do not offer the same services or products, and are not direct competitors. Learn more about vertical merger vs. horizontal merger differences in our dedicated article.

  • Conglomerate

A conglomerate merger occurs between two companies that operate in different industries and locations and are not direct competitors.

  • Market extension

A merger that aims at market extension takes place between two companies that offer similar products and services but are competitors in different markets. 

  • Product extension

A merger that aims at product extension occurs between two companies selling products that complement each other. Such companies are indirect competitors but in the same market.

Merger example: Raytheon and United Technologies

One of the recent merger examples is the deal between Raytheon and United Technologies, which can be classified as the market extension type of merger. In April 2020, Raytheon and United Technologies merged and formed a new entity: Raytheon Technologies.

The main reason behind the deal was to achieve improved economies of scale by combining their defense and commercial aerospace operations.

This is how Tom Kennedy, Executive Chairman of Raytheon Technologies, described the expectations from this merger of equals:

Our platform-agnostic, diversified portfolio brings together the best of commercial and military technology, enabling the creation of new opportunities across aerospace and defense for decades to come.

What is an acquisition?

An acquisition takes place when one company (acquiring company or purchasing company) acquires another (target company). As a result of an acquisition, an acquiring company absorbs the target, and an acquired company often ceases to exist or continues its operations under the name of the acquirer.

An acquisition usually occurs between companies that are not equal by operations: a financially strong company (an acquirer) purchases a smaller target company that is also relatively weaker by the scale of operations. By nature, acquisitions are not always friendly.

Just like with a merger, the main reason behind an acquisition is to gain a better competitive advantage. An acquirer aims at reducing the expenses of buying from a supplier, lowering its operation costs, expanding offered production or services, or acquiring important assets that will help to grow in the future.

Acquisition types

There are 2 main types of acquisitions:

  • Friendly

In a friendly acquisition, target companies agree on being acquired. It means that shareholders and management on both sides are in agreement with the acquisition. One company, known as a surviving one, acquires shares and assets of another company following the approval of the directors and shareholders. The other company, an acquired one, ceases to exist as a legal entity, and shareholders of the disappearing company receive shares in a surviving company.

  • Hostile

In a hostile takeover, a target company doesn’t want to be acquired. It means that the board of directors of the target company does not side with the acquiring company’s directors. However, in this case, the acquiring company can pay the target company’s shareholders for their shares (this is also known as a “tender offer”). This way, when having enough shares purchased, an acquiring company can prove an acquisition on its own or appoint its own officers and directors to run the target company as a subsidiary.

Acquisition example: Disney and Pixar 

One of the successful acquisitions examples is the deal between Disney and Pixar. In January 2006, Disney announced it was about to acquire Pixar in a $7.4 billion deal. After the deal’s completion, Pixar became a subsidiary of Walt Disney Studios.

The main reason behind this acquisition was Disney’s desire to benefit from Pixar’s animation expertise.

This is what Bob Iger, Disney’s CEO, said about their deal with Pixar:

I’m proud of a lot of the decisions that were made. Certainly, the acquisitions — I’d say of all of them — Pixar because it was the first. And it put us on the path to achieving what I wanted to achieve, which is scale when it comes to storytelling. That was probably the best.

What’s the difference between a merger and an acquisition?

The comparable table below shows how mergers and acquisitions differ in terms of 9 given categories.

1 ProcedureIn a merger, two organizations join forces to form an entirely new entityIn an acquisition, one company takes complete control of the operations of another company
2 NatureA merger is considered to be friendly by nature and planned by both parties involvedAn acquisition is considered to be hostile and sometimes even involuntary
3 Company’s nameA merged company gets a new nameTypically, an acquired company operates under the name of the parent company. However, sometimes an acquired company can continue operations under its name if an acquirer allows it
4 Comparative statureBoth companies involved in a merger are typically equal in size, stature, and scale of operationsAn acquiring company is usually a larger and financially stronger entity that purchases a smaller company
5 NegotiationsMerger negotiations primarily center around deciding how many shares each company will have in a newly formed entityIn an acquisition, negotiations usually focus on a purchase price
6 Power and authorityIn a merger, both parties involved have equal power and authority in the dealAn acquiring company typically has complete power over an acquired one
7 ManagementIn mergers, the management of the merged company is usually replaced by the new oneIn acquisitions, the management may remain the same after the deal’s completion
8 SharesIn mergers, the merged company issues new shares that are proportionally distributed among existing shareholders of both parent companiesIn acquisitions, no new shares are issued
9 Benefiting partyBoth merging companies can equally benefit from a mergerIn acquisitions, a purchasing company benefits from the deal more, while the target company either ceases to exist or operates under the acquirer’s name

Choosing between merger or acquisition based on the company’s strategic goals

When considering what strategy to choose for business growth (acquisition vs. merger) it’s essential to proceed from your company’s strategic goals and objectives your company wants to reach with the deal.

For example, if your company is seeking to expand market share, access new technology, or diversify its business, a merger would probably be helpful. And if your business wants to eliminate competition, an acquisition is likely to be the choice.

Other considerations to take into account when choosing between a merger and acquisition strategy are market analysis, resource assessment, cultural fit, financial evaluation, and legal issues.

Note: Read more about different types of synergies in mergers and acquisitions in our dedicated article.

Acquisition versus merger: Cultural and organizational differences

Culture clashes are the reason for 30% of failed post-deal integrations, no matter the type of the deal (merger or acquisition), according to Deloitte.

However, the way staff and organizational structure are managed during a merger and acquisition differs.

During a merger, the management of the company and redundant specialists are often laid off.

During an acquisition, the management of the company and specialists can remain the same or experience certain restructuring if an acquiring company allows that.

Insight: According to the research conducted by Culture Amp, employees feel more negatively when a company undergoes acquisitions than a merger. 

Final words

Though mergers and acquisitions are often used interchangeably, it’s essential to understand the primary merger and acquisition difference.

Mergers refer to the joining forces of two or more companies that form a new company. Acquisitions, in turn, refer to the process when one company purchases another company and gains full power over its operations. In acquisitions, an acquired company typically ceases to exist, which does not happen in mergers.

When choosing between a merger and acquisition strategy for a company’s growth, it’s important to understand the outcomes a merger and acquisition brings to business operations.