Merging with or forcibly acquiring another company can be a poignant strategic move. Whether you’re seeking to acquire a startup’s product or wipe a competitor off the board, M&A deals are a tool every good business must know about.
According to the Office for National Statistics, the international definition of an M&A deal is when a company gains at least 51% of ordinary shares or voting power in the company it wishes to acquire.
Even though these terms are bundled together, they’re not the same. Let’s discuss everything you need to know about mergers and acquisitions.
What is a merger?
Mergers are where two or more companies agree to combine their efforts to create an entirely new company. In most cases, mergers involve crafting a new brand and fresh structures.
Note that mergers are always consensual. In other words, both parties mutually agree that a merger is in both interests.
What those interests are depends on the deal in question. It could be as simple as growing revenue or consolidating in the face of a new industry threat. Alternatively, it may trigger a new era of market dominance.
For example, in 2023, Vodafone and Three agreed to combine their mobile businesses to create the UK’s largest wireless company. Naturally, competition scrutiny is a big part of this process, so the deal isn’t expected to be completed until the end of 2024.
Typically, mergers will only happen when each party is of a similar size and scale. Otherwise, the larger of the two would likely opt for an acquisition deal instead of a merger. This is because mergers only work when each side treats the other as an equal.
Why do businesses choose to merge?
Companies can choose to merge for a variety of reasons. Many of these justifications are the same ones used within acquisition deals, which is why so many assume that the terms are interchangeable.
Here are some of the reasons companies opt for mergers:
Growth – Simply put, growth could be the main priority. It’s much easier to grow when two companies pool their resources together. This applies whether referring to small businesses or multinationals.
Market Share – Merging to create a new, larger entity means you’re well-positioned to grow your market share. However, this has to be viewed with caution due to anti-monopoly laws and the role of the UK Competition and Markets Authority (CMA).
Diversify – Sometimes, two similar but different companies may merge to increase their range of services and avail themselves of the benefits of diversification within their portfolios.
Control – Another reason companies may merge is to achieve control of a particular part of the supply chain. This could involve merging with a supplier or distributor. Alternatively, merging to become a larger entity could provide more leverage when negotiating deals via economies of scale.
Knowledge Transfer – Talent and trade secrets are core to any successful business. Mergers enable two or more parties to use their unique knowledge to build something bigger than themselves.
These are only some of the most common reasons managing directors play with the idea of conducting a merger. Every organisation will have its aims that must be assessed before deciding whether a merger is the correct path forward.
How is a merger negotiated?
Mergers are negotiated in a different tone than acquisitions. This is because both parties have similar strength ratings, meaning neither party can steamroll the concerns or demands of the other.
In other words, these types of negotiations are conducted in a friendly environment. Plus, many managing directors find fewer sticking points than expected because both parties want the deal to go through to their benefit.
Mergers are negotiated with the same team as with acquisitions, which can include:
- Solicitors
- Bankers
- Accountants
- Marketers
- PR teams
Although a merger may be conducted with a friendly party, it doesn’t cut out any steps in the process or remove the need for in-depth due diligence. Even though everyone might be friends, this is still business, and if the deal doesn’t make sense, it makes sense to walk away.
What is an acquisition?
Acquisitions are where one company acquires the business of another company. Rather than creating a new combined entity, the acquired brand ceases to exist as a legal entity entirely.
The acquirer may still leverage the brand as a name, but it’ll fall under the umbrella of their organisation. This is why acquisitions are also known as “takeovers.”
Unlike mergers, acquisitions involve a stronger company purchasing a weaker one. An example of this would be Amazon’s acquisition of Whole Foods. Additionally, not every acquisition occurs by consent.
Sometimes, there may be what’s known as a hostile takeover, where a company takes control of another without its consent.
The most basic example would be a large company purchasing 51% of the shares in another company on the open market. Another could include a shareholder privately selling their shares against the wishes of other stakeholders.
Moreover, these hostile takeovers can involve tactics many would consider immoral. For example, using a foreign holding company with no clear line to the actual purchaser would be considered extremely underhanded.
Thankfully, hostile takeovers are relatively rare and make up a tiny proportion of overall deals. According to the Centre for Business Research, just 43% of UK hostile takeover attempts are successful, with this number declining to 24% in the U.S.
Why do businesses choose acquisition?
Companies can opt for an acquisition for the same reasons as they would with a merger. Ultimately, the goals are the same. It’s only the parties and the structure of the deal that change.
Some of the most popular reasons for acquiring a smaller company include:
- Growing your market share.
- Acquiring new technology.
- Entering a new market.
- Expanding horizontally/vertically.
- Acquiring new talent.
- Removing a competitor.
Your reasons for launching an acquisition are your own. What matters is that they match up with your brand’s long-term strategic vision. Poorly planned acquisitions can cost companies millions.
How is an acquisition negotiated?
Believe it or not, this is also something an acquisition has in common with a merger. Most acquisitions are carried out under friendly conditions.
Unless you’re engaged in a hostile takeover, the acquiring company wants to acquire, and the acquired company wants to be acquired. The same personnel are involved, and you’ll follow the same legal and due diligence processes.
In fact, in many cases, negotiations may be concluded faster because there are no discussions about combined entities or the future running of the company.
Every acquisition however, is different.
The differences between mergers and acquisitions
Mergers and acquisitions usually have identical motives, but the difference is how a company goes about achieving its goals. On the other hand, several significant wrinkles exist between the two that you need to know before deciding which option is right for you.
So, what are these differences?
New Entity
Mergers will always lead to the rise of a new, combined entity. With an acquisition, the acquiring company will absorb the brand into its existing operations.
Even though the same employees and management team may keep their jobs, the previous brand and structure will usually cease to exist.
Company Size
The big difference is in the power dynamics. Merging companies are of similar size, structure, and stature, so they consider themselves suitable for a merger.
On the other hand, an acquisition involves a powerful entity absorbing a smaller entity.
Power Spread
Following the conclusion of negotiations and the deal’s approval, the next phase is to initiate a pre-prepared integration plan.
The integration plan will involve spreading power between multiple parties if it’s a merger. For example, the combined entity may have a 50-50 split between former managing directors.
In an acquisition, the acquiring company can integrate a new organisation as they see fit. Some deals may give some authority to the seller, but the acquirer maintains control.
Operations
From an operative standpoint, a merger may not mandate any changes to your usual operations at all. Some merged companies operate with relative independence but under the same banner.
In contrast, an acquisition is where a company will take complete control of another company, along with its operations and branding.
Shares
Finally, there’s the issue of shares. Mergers will result in issuing shares as part of the combined entity.
Not so for an acquisition. Since there’s no new entity, the acquirer has no reason to issue brand-new shares.
Benefits of mergers vs acquisitions
Now that you have established the differences between the two and that both have similar drivers, which should you choose?
Each option has its advantages and disadvantages. There are no hard and fast rules for determining which option makes better long-term sense for your business.
In the meantime, let’s examine some of the benefits of acquisitions and mergers:
Benefits of Mergers
- Both organisations benefit from the union.
- Each involved party can continue to operate.
- Equal decision-making power.
- Both brands continue to exist.
- Pool your collective resources to achieve greater goals.
Benefits of Acquisitions
- Retain full decision-making power by absorbing another company.
- Your brand continues to operate as before because no new entity is created.
- Increased capital, new inventory, technology, customers and employees for the acquiring company.
- No branding changes are required.
- No requirement to issue new shares.
Is a merger or acquisition the best option for a business?
Deciding between a merger and an acquisition is tricky because of the differences between the two. However, neither option is the best. They’re simply tools to be deployed in the correct circumstances.
In other words, it depends on factors ranging from size to what you want to achieve by making a deal. As a general rule of thumb, an acquisition will always be the go-to option if your company is significantly larger than the other.
With this in mind, Hilton Smythe is there to support your decision-making processes. If you’re weighing up a deal or preparing to enter negotiations, contact our team for professional, objective advice today.
