Mergers and acquisitions (M&A) combine two business entities into a single one. A merger takes place when the two businesses form a new, third entity. On the other hand, in case of an acquisition, one company purchases and absorbs the other into its operations. The goal of a merger or acquisition largely tends to be to create a brand-new entity that is more effective and efficient than the two previous companies were on their own. Earlier, Anand Jayapalan had spoken about how M&A initiatives provide a range of financial benefits to the owners of the original companies, as well as the owners of the newly merged entity. Many shareholders tend to cash out their stocks as part of the deal, while several others keep their shares and profit from higher dividends as the new company grows.
The beneficial aspects of M&A are many, including:
- Enhanced economies of scale: By purchasing raw materials in larger quantities, companies can lower their expenses.
- Expanded market share: When two companies in the same industry combine their resources, they can potentially capture a larger portion of the market.
- Broadened distribution capabilities: Geographic expansion can help companies grow their distribution networks or extend their service areas.
- Lowered labour costs: Reducing staffing redundancies can lead to cost savings.
A merger requires two companies to consolidate into a new entity with a new ownership and management structure, ideally with members of each firm. The most common difference between a deal is whether the purchase is friendly (merger) or hostile (acquisition). Friendly mergers of equals, however, do not take place very frequently in reality. It is fairly uncommon that two companies shall benefit from combining forces with two distinctive CEOs agreeing to give up a certain level of their authority to realize those benefits. In case this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.
Mergers are commonly carried out for the purpose of lowering operational expenses, elevating profits and revenue, as well as expanding into new markets. Mergers are generally voluntary and involve companies that are roughly the same size and scope.
In case of an acquisition, a new company does not emerge, but rather a smaller enterprise tends to be consumed and ceases to exist, as its assets become part of the larger company. Acquisitions, at times, are also called takeovers. Acquiring companies may refer to an acquisition as a merger even though it is clearly a takeover. An acquisition occurs as a company takes over all of the operational management decisions of another firm. Acquisitions require large amounts of cash, but the power of the buyer is absolute.
Earlier, Anand Jayapalan had mentioned that companies may acquire another firm to gain access to their supplier and improve economies of scale, in order to lower the costs per unit as production increases. Companies may even want to explore ways to improve their market share, expand into new product lines and lower expenses. Companies today also engage in acquisitions to obtain the technologies of the target company. Doing so can actually help save years of capital investment costs and research and development.
Contemporary corporate restructurings are widely referred to as merger and acquisition (M&A) transactions instead of simply a merger or acquisition.
