Mergers vs Acquisitions

Updated on May 23, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Mergers and Acquisitions

Merger refers to consolidating two or more business entities to form one joint entity with the new management structure, ownership, and name capitalizing on its competitive advantage and synergies. In contrast, the acquisition is the case where one financially strong entity takes over or acquires a less financially strong business entity by acquiring all shares or shares with a value greater than 50% of its total shares.

Both are corporate strategies aimed at increasing the present capabilities of a company. Sometimes both terms are misunderstood as merely adjoining two or more companies, but these terms are quite different.

Mergers-vs-Acquisitions

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  • A Merger is a process by which two or more companies make a strategic decision to come together and merge as one company with a new name. Merger helps the company share information, technology, resources, etc., thereby increasing the company’s overall strengths. The merger also helps reduce the weakness and gain a competitive edge in the market. Merger always happens on friendly terms as the information is already passed to the directors, employees, etc. Proper planning is done on the structuring of the new company.
  • The acquisition is the process by which one company acquires another company. The financially strong company acquires more than 50% of shares to take over another company. The acquisition doesn’t always happen on friendly terms. It can be a forced move by a company to acquire another company for various reasons like gaining new markets or gaining new customers or reducing competition etc. But acquisition can also happen when one company decides to acquire another company without any hostility. In an acquisition, the transition is not always smooth as the company that took over will impose all the decisions on staffing, structure, resources, etc., thereby creating an air of unease to the company that was acquired and its employees.

Key Takeaways

  • Mergers create a new business from two or more other businesses. At the same time, acquisitions involve a financially powerful company buying a weaker one by obtaining its shares.
  • The preference for mergers and acquisitions depends on the circumstances of the companies involved.
  • Companies must carefully analyze their business situation and plan strategic decisions suitable to their needs depending on discussions with other companies.
  • Mergers require creating a new company and involve more extensive legal formalities and processes than acquisitions.

Video Explanation of Amalgamation vs. Merger

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Mergers vs. Acquisitions Infographics

Merger-vs-Acquisition

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Key Differences

  • One of the key differences is that the merger is when two or more companies agree to come together and form a new company; acquisition is when a financially strong company takes over a less financially strong company by buying more than 50% of its shares.
  • The merger is a strategic decision made after careful discussion and planning between the companies going to be merged. Hence there are fewer chances of a chaotic atmosphere after merging. The acquisition is also a strategic decision, but the decision is not mutual in most cases. Hence, there is a lot of hostility and chaos after an acquisition has been made.
  • The power difference between the acquired and acquiring companies is huge. Companies that are merged usually consider each other of equal stature, and hence they help each other out to create a synergy. In the case of an acquisition, the company that acquires it imposes its will on the acquired company, and the acquired company is stripped of its freedom and decision-making.
  •  Since the merger requires a whole new company to be formed, it needs many legal formalities and procedures to be followed. The acquisition doesn’t have many legal formalities and paperwork to be filled compared to the merger.

Merger vs. Acquisition – Comparative Table

Basis for ComparisonMergerAcquisition
DefinitionThe merger is a process in which more than one companies come forward to work as one.The acquisition is a process in which one company takes control of another company.
TermsConsidered to be friendly and planned.Considered to be hostile and sometimes involuntary (not always)
TitleA new name is given.The acquired company comes under the name of the acquiring company.
ScenarioTwo or more companies that consider each other on equal terms usually merge.Acquiring a company is always larger than the acquired company.
PowerThe power-difference is almost nil between the two companies.The acquiring company gets to dictate terms.
StocksMerger leads to new stocks being issued.In an acquisition, there are no new stocks issued.
ExampleMerging of Glaxo Wellcome and SmithKline Beecham to GlaxoSmithKlineTata Motors acquisition of Jaguar Land Rover

Conclusion

We may decide that a merger is always better than an acquisition when comparing mergers and acquisitions. But just like how each coin has two sides, both have their strengths and weaknesses.

Companies make these decisions based on their situation and the resultant discussions that they have had with the other companies. So, it is wise for companies to carefully analyze the position that they are in and take the strategic decision that better suits the scenario and demands.

Recommended Articles

This article has been a guide to Merger vs. Acquisition. Here we discuss the top differences between merger and acquisition, infographics, and a comparison table. You may also have a look at the following articles for gaining further knowledge –

Reader Interactions

Comments

  1. Raju says

    It’s a good article, short and sweet good to read and helps to mitigate the misuse of time…
    Thanks

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. gary says

    excellent information to know about the items to invest with these items

  3. Faz says

    Well explained in simple way

    • Dheeraj Vaidya says

      Thanks for your kind words!

  4. Mratunjay singh parmar says

    Easily understanding language and good description

    • Dheeraj Vaidya says

      Thanks for your kind words!

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