Mergers and acquisitions (M&A) are common in the business world. In fact, according to IMAA, businesses struck 6,425 deals in the United State alone in 2021! But what’s the difference between a merger vs acquisition? And which one is right for your business?
In this blog post, we will discuss the three main types of mergers and what distinguishes them from an acquisition. We will also look at the benefits and drawbacks of each process so you can make an informed decision about which is best for your business!
Merger Vs Acquisition
Mergers and acquisitions (M&As) are two terms many use interchangeably. However, business owners should be aware of the key differences between a merger vs acquisition.
A merger occurs when two or more companies join together to create a new company. On the other hand, an acquisition happens when a financially strong company takes over a less economically strong company. The merging companies create a new legal entity.
The acquired company no longer exists. Its operations and assets become part of the larger acquiring company.
Both mergers and acquisitions involve a transfer of ownership, but the key difference is that both companies continue to exist and become one legal entity in a merger. In an acquisition, only the stronger company remains intact.
How a Merger Works: Two Companies Combine Into One Company
When two business entities join forces and merge, the new organization created by the merger often develops a new management structure. The new business entity may rename and rebrand its newly merged organization.
Merging companies combine their assets in a strategic decision that benefits both organizations, combining resources to create a healthier company together. The companies agree that a merger creating a joint entity is better for their business.
A merger contract between similar size companies, equal in their business valuation, creates a new company which then issues new shares to the parent companies’ existing combined shareholders.
With one organization instead of two, the newly created company may be able to accomplish many goals, including the following:
- Attain higher profits
- Expand their market share
- Reduce operational costs
If you’re considering a merger, talk with a North Carolina business attorney to ensure good business practices and a smooth transition!
Types of Mergers
There are three different types of mergers: horizontal, vertical, and conglomerate.
A horizontal merger involves merging two similar businesses integrating into a single organization. This type of merger is common when the companies offer similar. Businesses combine forces in order to increase their market share. One business merges with another that is in direct competition with it.
A vertical merger happens when one company acquires another that belongs to the same supply chain. Vertical mergers often help the acquiring company gain access to a new customer base or acquire intellectual property or technology to stay competitive in their industry. (1)
When two distinct businesses come together to take advantage of mutual economic advantages, they create a conglomerate merger. Such advantages can include risk mitigation and spreading operational costs over a larger entity.
How an Acquisition Works: An Acquiring Company Takes Over Smaller Company
In an acquisition, a financially strong company takes control of a smaller company. The acquiring company buys the shares of the target company, taking ownership in the transaction.
When one company absorbs another, it must purchase at least 51% of the target company’s stock to have complete control. This purchase usually occurs between larger and smaller organizations, with a more financially stable organization taking over its less secure counterpart.
An acquisition is an effective way for businesses to increase their size and strengthen their market presence.
A group of investors attempting a hostile takeover of a public company may set up a shell company to take ownership of the company should the hostile takeover succeed. (2) The investors purchase equity interests solely to gain controlling interest and make hostile acquisitions. The parties involved in taking over the target firm do not offer purchase agreements or a merger as an option.
It is known as a hostile takeover when a larger company buys up a target company’s shares and then takes over the operations without the target company’s consent. Hostile takeovers may be beneficial for the company making the acquisition, but they can often make employees of both companies feel uncertain about their positions.
Despite the cost of an acquisition, it is usually a less costly approach than starting from scratch. As long as the acquiring company can maximize the value from the acquired business, an acquisition may prove a beneficial investment.
In an acquisition, the parent company takes control of the acquired organization’s assets and operations as part of their own. The second company no longer exists as a separate entity. All of its staff, resources, and assets become part of the larger company.
However, if the parent company chooses, it may keep an acquired business’s name and brand as a part of the parent organization.
Acquiring companies often benefit from acquisitions due to increased market share and new customers.
Making an Informed Decision Before a Merger or Acquisition
Whether you’re considering a merger or an acquisition, ensure you understand the critical differences between mergers and acquisitions and each process’s potential benefits and drawbacks.
Mergers and acquisitions can benefit companies in many ways. A company may gain access to new markets, products, technologies, or customer bases. These benefits can bring new profits if companies have complementary strengths they can leverage.
However, mergers and acquisitions can also have their drawbacks. The process of combining two companies can be complicated and costly. It’s essential for business owners to carefully weigh the pros and cons before deciding whether or not to pursue a merger or acquisition.
With careful planning, you can ensure that any merger or acquisition is successful.
Working with an experienced business attorney can help you see whether a potential merger or acquisition will give your business the profit margins, cost savings, and shareholder value you need! A knowledgeable business attorney can also help you work through a purchase agreement or sort out what a merger requires from you.
Our Experienced North Carolina Business Attorneys Can Help
At Hopler, Wilms, and Hanna, we can help you make strategic decisions during a business merger or acquisition. We understand state law that may affect you during the process in North Carolina. And we can help your new enterprise cope with operational issues, consider how you’ll integrate, or enter new markets to maximize profits!
Our experienced North Carolina business attorneys work with clients across the state to ensure businesses make well-informed decisions that bring success!
Contact us today to learn more about how we can help with your merger or acquisition!