Mergers and Acquisitions: Definitions, Types, and Differences

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Executive Summary

When two firms merge and acquire, they produce synergy and increase the business value. Mergers and acquisitions among corporations are getting popular as a result of increased rivalry among corporations in both the local and worldwide markets. Although the terms mergers and acquisitions (M&A) are used interchangeably, they have separate legal implications. According to the Corporate Finance Institute (n.d.), a merger involves joining two firms of equal size to establish a new single company. On the other hand, acquisition takes place when a more prominent organization absorbs the smaller company’s operations. M&A transactions can be cooperative or aggressive, depending on the target company’s board of directors’ consent.

Types of Mergers

Essentially, there are five types of mergers. A merging of companies engaged in completely unrelated commercial operations is called a conglomerate. Moreover, conglomerate mergers are classified into two types: pure and mixed. Pure conglomerate mergers include businesses that have nothing in common, whereas mixed conglomerate mergers involve enterprises seeking product or market extensions (Minority Business Development Agency, n.d.). A horizontal merger takes place between firms in the same industry. Thus, a horizontal merger is a business consolidation between companies operating in the same sector, frequently as competitors delivering the same product or service. A horizontal merger aims to establish a new, more prominent firm with a larger market share.

A market extension merger occurs when two firms provide the same products but in different markets. The primary goal of a market extension merger is to ensure that the merging firms have access to a larger market, resulting in a more extensive customer base. A product extension merger occurs when two businesses deal in products or services similar to one other and operate in the same market. The product extension merger allows the merging firms to group their products and access a larger range of consumers. Significantly, a vertical merger is a merger of two enterprises that produce distinct items or services for the same result. Hence, a vertical merger occurs when two or more companies that operate at various levels of an industry’s supply chain consolidate their operations. The most typical reason for a merger is to maximize synergies achieved by merging businesses that would be more efficient in functioning as one.

Types of Acquisitions

An acquisition occurs when a firm purchases another’s assets or most of its shares. Acquisitions are classified into five types (Johnson Corporate, n.d.):

  • Value creating occurs when a firm purchases another business, enhances its efficiency, and resells it to profit.
  • Consolidation happens when a company purchases another to eliminate rivalry in an over-supplied industry.

Accelerating is when a stronger firm acquires a smaller company and leverages its superior resources to expedite market access for its goods. Acquisition of resources is when a firm purchases another business to obtain the assets, expertise, intellectual property, technology, or market position required; it is more cost-efficient than building their own. Speculating occurs when a larger firm buys a smaller company with a novel product to capitalize on its future growth potential.

Differences

The distinction between merging and acquiring is critical when assessing, negotiating, and arranging a customer’s deal. Nicholas et al. (2002) state that acquiring another company allows owners to:

  • First, obtain a running business at a specific place. Second, create a niche and bring in more of a particular sort of business.
  • Additionally, a company’s owner can boost productivity while keeping fixed expenses constant.
  • Moreover, acquisitions maximize help gain access to neighboring market segments.
  • Ultimately, they assist in increasing the firm’s worth.

On the contrary, mergers allow to:

To implement a succession plan and secure retirement through new ownership. Mergers help distribute responsibilities among a more significant number of individuals (Nicholas et al., 2002). Finally, a larger organization’s security is enabled, referring to a strategy for dealing with greater competition.

Why Choose Merger over Acquisition?

There are several reasons firms decide to merge rather than integrate through acquisition. Some of the more frequent reasons are as follows:

Nicholas et al. (2002) suggest that a merger does not necessitate the expenditure of funds. Moreover, both parties may benefit from a tax-free merger.

Instead of being confined to sales profits, a merger allows the target to realize the appreciation potential of the merged firm.

A merger allows smaller entity owners to boost their overall net worth. Additionally, this integration method between a privately owned firm and a publicly traded corporation permits the target company’s owners to obtain public company equity. A merger helps the acquirer bypass lease assignment and bulk-sales notices.

Top Five Tips for Successful Mergers and Acquisitions

The top five tips for successful mergers are the following:

First, it is crucial to ensure that all parties are treated fairly. How each party engages in the transaction determines the partnership’s success. Moreover, companies should recognize the importance of culture and avoid the “we vs. them” mindset. Culture shock exists on both sides and must be handled quickly. Shifrin (2021) suggests that every deal should be taken seriously because a bad reputation can negatively impact the company’s future. Knowing when to leave is critical because not every possibility is worth taking a chance. The company should analyze all the strengths, weaknesses, opportunities, and threats before making a final decision. Ultimately, alignments should be obtained from the appropriate people.

References

Corporate Finance Institute. (n.d.). Mergers & acquisitions (M&A). Corporate Finance Institute. Web.

Minority Business Development Agency. (n.d.). 5 types of company mergers. Minority Business Development Agency – U.S. Department of Commerce. Web.

Johnson Corporate. (n.d.). An overview of the different types of mergers & acquisitions. Johnson Corporate Business Sales & Acquisitions. Web.

Nicholas, J., Zunitch, M, & Zunitch, V. M. (2002). Difference between mergers and acquisitions. Journal of Accountancy. Web.

Shifrin, L. (2021). Top five tips for successful mergers and acquisitions. Forbes. Web.

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BusinessEssay. (2022) 'Mergers and Acquisitions: Definitions, Types, and Differences'. 17 December.

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BusinessEssay. 2022. "Mergers and Acquisitions: Definitions, Types, and Differences." December 17, 2022. https://business-essay.com/mergers-and-acquisitions-definitions-types-and-differences/.

1. BusinessEssay. "Mergers and Acquisitions: Definitions, Types, and Differences." December 17, 2022. https://business-essay.com/mergers-and-acquisitions-definitions-types-and-differences/.


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BusinessEssay. "Mergers and Acquisitions: Definitions, Types, and Differences." December 17, 2022. https://business-essay.com/mergers-and-acquisitions-definitions-types-and-differences/.