What Is The Difference Between a Merger and Acquisition?

What Is The Difference Between a Merger and Acquisition?

Mergers and acquisitions are two standard corporate restructuring methods that companies use to enhance their worth and increase their profits. When it comes to the business world, it is not unusual to hear both words used interchangeably. In reality, the difference between a merger and acquisition is vast. 

To help you better grasp the difference between merger and acquisition corporate restructuring, we’ll take a deeper look at both concepts.

What Is A Merger?

In business, the difference between mergers and acquisitions is that mergers are the voluntary joining of two businesses on essentially equal terms to form a single new legal company. The companies that have agreed to combine are nearly similar in size, clients, and scope of operations.

The most frequent reasons for mergers are to gain market share, decrease operating costs, expand into new areas, combine shared goods, raise revenues, and improve profits, all of which should benefit the shareholders of the acquiring and merging companies. For smaller companies, it is to move from one state to another and continue to have the same EIN and tax status. Immediately after a merger, shares of the newly formed firm are given to the existing shareholders of the two original companies.

Types Of Mergers

Horizontal Merger

A horizontal merger happens when two businesses in the same industry combine. Typically, a merger occurs as part of merging two or more rivals that provide the same goods or services. These mergers are frequent in sectors with fewer companies to create a bigger company with a more significant market share and economies of scale since rivalry among smaller firms is often more intense.

Vertical Merger

Vertical mergers occur when two businesses that manufacture components or services for a product combine. Vertical mergers occur when two companies operating at distinct points along the supply chain of the same industry combine their activities. These mergers are made to maximize synergies created by cost savings associated with merging with one or more supplier businesses.

Product Extension Mergers

Congeneric mergers are referred to as Product Extension mergers. This is a merger of two or more businesses that operate in the same market or industry and share common technology, marketing, manufacturing processes, and research and development characteristics. A product extension merger occurs when one business adds a new product line to another company’s current product line. When two businesses merge under the premise of a product expansion, they get access to a broader set of customers and, therefore, a greater market share.

Conglomerate Merger

A Merger of two or more unconnected businesses. The businesses may operate in a variety of sectors or geographical areas. A pure conglomerate is comprised of two unrelated businesses. On the other side, a mixed conglomerate is formed when companies with unrelated commercial operations combine in order to obtain a product or market expansion.

Market Extension Merger

This kind of merger happens between businesses that offer comparable goods but operate in distinct markets. Companies that enter into market extension mergers do so in order to acquire access to a larger market and, therefore, a more extensive customer base.

What Is An Acquisition? 

An acquisition occurs when one firm acquires the majority of all of the shares of another company in order to take control of that business. Purchasing more than 50% of a target business’s stock and other assets enables the acquirer to make choices regarding the newly acquired assets without obtaining permission from the company’s other shareholders. Acquisitions, which are very frequent in business, may occur with or without the target company’s consent. During the approval procedure, there is often a no-shop provision.

We often hear about acquisitions of big, well-known businesses because these massive and important transactions frequently dominate the headlines. However, they are more common with smaller companies. 

Companies purchase other companies for various reasons, and they may be looking for economies of scale, diversification, higher market share, enhanced synergy, cost savings, or new specialized products. Among the other motivations for acquisitions are those mentioned below.

  • Enter a Foreign Market
  • Decrease Competition
  • Growth Strategy
  • Gain New Technology

Types Of Acquisitions

Friendly Takeover

If the target company agrees to be acquired, a friendly acquisition occurs.

Buyout Takeover

The acquiring company acquires control of a business by purchasing more than 50% of the company’s shares.

Hostile Takeover

Unfriendly acquisitions, often referred to as “hostile takeovers,” occur when the target business does not agree to the acquisition being made.

Hire An Experienced Business Attorney!

The Law Office of EC Lewis PC has provided Legal Solutions for Small Businesses for over a decade including helping businesses understand the difference between a merger and acquisition and determining which is right for their business. We aim to provide sound legal assistance to businesses of all types. Assisting businesses ranging from single proprietors who are just getting started to corporations with over 100 staff and an expanding customer base, we take the time to get to know each of our customers and offer personalized service. If you have more questions about the difference between a merger and acquisition or how to get the process started, contact us today!