Acquisition and merger mostly occur when two companies agree to join their forces together. Both terms are often used interchangeably although there should be recognition of differences between the two.
Cynics can say that there is no such thing as a merger. Someone always writes a cheque – receives a cheque; someone is in charge afterward. Announcing a merger usually looks advance than an acquisition to staff and investors – it is a welcome term in the press release when announcing the deal.
Acquisition occurs when one company’s allowance takes over another company. Hopefully, the acquiring company retains all the positive attributes of the target company although it is clear who acquired who. Usually, a company buys out a relatively smaller company, either through cash either the distribution of stocks.
Big companies broadly buy out emerging or rival firms, either to add value to the
company as a choice assuage competition. Small companies, in turn, sell themselves for various reasoning which cannot be generalized. Acquisitions occur when smaller companies, performing well, want to exit or reshuffle management.
When two existing companies unite to form a larger entity, a merger occurs. Stocks of both the companies are diluted and fresh stocks of newly formed bigger entities are issued to the existing shareholders. Mergers occur among companies that come to terms in joining forces and it is clear the joining parties retain most or all of their attributes.
Companies globally adopt these approaches to grow within the competitive market.
The merger has been described within the Companies Act, 2013 because of the combination of two business entities to form a replacement entity. The acquisition, on the opposite hand, associates one-party sales bent another wherein the buying party combines both the entities to form it into one entity.
A merger has essentially finished the aim of expansion of business units and to broaden the hands in every corner of the market making an entry to new segments for gaining market limelight.
Mergers & Acquisitions therefore can be simplistically viewed as a buy decision in a build Vs buy evaluation of targeting growth. This especially makes sense in mature industries, where the incremental dollar investment cannot result in comparable organic growth. We spoke of multiple perspectives. Consider some of them.
The CFO’s perspective would be a. Enterprise Value growth will be higher through acquisition rather than build-out. Return above Capital Employed in an acquisition will be greater than that through organic growth. There is surplus cash that is further leveraged through cheap debt into buying another company. Overheads will be better absorbed by the large size of business. etc.
The CMOS perspective could be a. A competitor is canceled thus simplifying attempts to gain market share. The product portfolio is appreciated quickly without going through trials, experiments, etc. The effort curve to acquire new distribution channels is compress. etc. A CTO efficacy have some thoughts on synergies, a CHRO might see talent acquisition improving as choice attrition reducing because a competitor is getting absorbed. etc.