When two businesses decide to combine forces, there are a few different ways that this can happen. The most common way for two businesses to join together is through a merger. However, sometimes one business will buy another business in what is called an acquisition. So, what is the difference between a merger and an acquisition? Let’s define merger and acquisition and discuss how they’re carried out.
Merger vs. Acquisition: Why Do Businesses Combine?
There are a few different reasons that businesses might combine. One reason is to create economies of scale. When two businesses join together, they can share resources and save money by producing and selling products or services as a single entity. This can be especially helpful if the two businesses are in competition with each other.
Another reason for businesses to merge is to gain market power. By combining their resources, the new business will be able to compete more effectively against rivals. In some cases, the new business might even become the industry leader.
A third reason for businesses to merge is to create a monopoly or duopoly. A monopoly is when one business dominates the market, and a duopoly is when two businesses dominate the market. By combining forces, the new business will be able to reduce competition and increase profits.
The goals of each business will be the difference between a merger and an acquisition. A business’s merger and acquisition strategies will vary based on a number of factors. These can include exit strategies, retirement plans, employee welfare, and many more.
What Is a Merger?
A merger occurs when two businesses join together to form a single entity. In most cases, both businesses will cease to exist as independent entities and will become part of the new company. The process of merging can be complex, and it’s important to make sure that all of the necessary steps are taken in order to avoid any legal issues down the road.
There are three main types of mergers:
- Horizontal merger: This occurs when two businesses that compete with each other decide to join forces. An example of a horizontal merger would be when Kraft Foods and The H.J. Heinz Company merged to become The Kraft Heinz Company.
- Vertical merger: This occurs when a company decides to merge with one of its suppliers or customers. An example of a vertical merger is the merger between Pepsi and Coke and their respective bottling companies.
- Conglomerate merger: This occurs when two companies that are not in the same industry decide to merge. An example of a conglomerate merger is the merger between internet service provider AOL and television production company Time Warner.
What Is an Acquisition?
An acquisition occurs when one business buys another business. Unlike in a merger, only one of the businesses will continue to exist after the acquisition is complete. The business that is bought by the other business is known as the target company, and the business that does the buying is known as the acquiring company.
The process of an acquisition can also be complex, and it’s important to make sure that all of the necessary steps are taken in order to avoid any legal issues down the road. There are two main types of acquisitions:
- Friendly acquisition: This occurs when the target company agrees to be acquired by the acquiring company. In most cases, this happens because it’s beneficial for both companies. This is what happened when Facebook took over WhatsApp.
- Hostile acquisition: This occurs when the acquiring company tries to take over the target company without its consent. This can happen by the acquiring company buying a majority of the target company’s shares or by making an offer that shareholders accept over the executives of the company. The latter is exactly what happened when InBev took over Anheuser-Busch.
Merger and Acquisition Process
Now that you understand the difference between a merger and an acquisition, let’s take a look at the merger and acquisition process. Whether your business is involved in a merger or acquisition, you will need to come to an agreement with another business owner on terms and price. You will not only need to determine how money will change hands, but also who will be in charge of what after the businesses merge.
There are a few steps that need to be taken in order for a merger to be successful:
- First, both companies need to agree to the merger. This usually happens through negotiation between the two companies’ CEOs.
- Second, the two companies need to agree on a price for the merger. This is usually done through a bidding process.
- Third, the two companies need to agree on who will lead the new company.
There are also a few steps that need to be taken in order for an acquisition to be successful:
- First, the acquiring company needs to find a target company that is willing to be acquired. This can happen through negotiation or a bidding process.
- Second, the acquiring company needs to agree on a price for the acquisition.
- Third, the acquiring company needs to get approval from its shareholders.
As you can see, there are some similarities between the merger and acquisition process. However, there are also some key differences. One of the biggest differences is that in a merger, both companies will combine to form a new entity, while in an acquisition, only the acquired company, if it continues to exist, will be a subsidiary of the acquiring company.
Which Process Is Better for the Employees?
This is a difficult question to answer because it depends on the individual situation. In general, though, employees tend to prefer mergers over acquisitions because there is less uncertainty with a merger. With an acquisition, there is always the possibility that the target company will be shut down and all of its employees will lose their jobs. This rarely happens in a merger, though, because the businesses are combining voluntarily.
Planning Your Merger or Acquisition with Michigan CFO
If your business is looking at a merger or acquisition, you need competent financial guidance to walk you through the process. Without a CFO, you could end up getting the short end of the stick in a merger or acquisition. Ensure you retain the control you want and get the valuation you deserve. Contact Michigan CFO today!