Have you ever considered merger and acquisition as possible business strategies?
As of 2021, there are over 31.7 million small businesses registered in the US. Most business owners are staying independent, which makes it for them more challenging in the fast-paced and globalized world.
It makes sense sometimes for them to join forces with other business entities. If you want to learn the difference between acquisition vs merger, we can help you with that.
Read on to learn more about this blog.
What is an Acquisition?
An acquisitor is a corporate entity that engages in the process of deal sourcing and acquiring other businesses.
The purpose of an acquisition is to obtain a controlling interest in another company, intending to expand the acquirer’s market share, geographical reach, or product range.
In some cases, an acquisition can also be motivated by the desire to acquire the target company’s talent pool or technology.
What is a Merger?
A merger is the combination of two companies into one. The new company is typically larger than either of the two original companies. The merged company inherits the assets and liabilities of both of the original companies.
It can happen for a variety of reasons, such as to expand the company’s reach, increase market share, or reduce costs.
Advantages of Acquisition
An acquisition can help a company diversify its product offerings or expand its geographic footprint. The following are the advantages that can help a company achieve economies of scale:
Make Informed Decisions
When making decisions about acquisitions, companies must consider many factors, including the strategic fit of the target company, the financial impact of the acquisition, and the regulatory environment.
Grows the Company
It’s done by buying another company or by buying a stake in another company. Acquisitions can also acquire new customers, new technology, or new products.
Reduces Costs
By consolidating two companies, you can often eliminate duplicate positions or departments, and save on things like advertising and office space. You can also use your increased size to negotiate better deals with suppliers.
Advantages of Merger
The most important thing to remember is that a merger is not a takeover. Both companies need to be on an equal footing for the merger to be successful. Below are its advantages:
Increased Market Share
By merging with another company, a company can immediately increase its market share. It can also become a dominant player in the industry.
Economies of Scale
A merger can also lead to economies of scale, which refer to cost savings. It’s achieved by increasing its production output.
Increased Financial Stability
A merger can also make a company more financially stable by giving it a larger pool of assets. It can also have a more diversified customer base.
Increased Growth Potential
A merger can also give a company increased growth potential by giving it a larger base of operations. Also, it can have access to new markets.
Disadvantages of Acquisition
There are several disadvantages to acquisition as a growth strategy. The following are examples:
Cultural Clashes
This can happen when one group moves into the territory of another. If these different groups are unable to find a way to coexist, cultural clashes can lead to violence and even warfare.
Difficult to Integrate
They can be difficult to integrate due to a variety of reasons, including differing business models or a lack of complementary capabilities. As such, careful due diligence is essential when considering such a target.
Expensive
An acquisition is a purchase of one company by another. These can be expensive, as the purchase price is often quite high. This is due to the purchase price, the costs of integrating the two companies, or both.
Disadvantages of Merger
There are several disadvantages of a merger that can be significant enough to scupper a deal. Examples of these are the following:
Less Efficient
When two companies merge, the resulting company is usually less efficient than the two original companies. This is because the new company has to duplicate many functions that were previously performed by only one company.
Higher Debt-to-Equity Ratio
The term “higher debt-to-equity ratio” usually refers to a company that has more debt than equity. In a merger, the companies usually have different debt-to-equity ratios.
Potential for Job Losses
When two companies merge, there is often a reduction in the workforce. This is because the new company is often to streamline the workforce and reduce redundancy. In some cases, job losses are due to the closure of duplicate facilities.
Procedure of Acquisition
Acquisitions are generally done with the intent to grow or expand the acquirer’s business. The acquirer’s management team typically stays in place, and the target’s employees and assets become part of the acquirer.
The procedure of acquisition is usually more complicated and takes longer than a merger.
Procedure of Merger
Both companies have to sign a Letter of Intent, which is a non-binding document that outlines the proposed transaction. Once the Letter of Intent is signed, the due diligence process begins.
This is when both companies exchange information and conduct investigations to make sure the merger is a good fit.
If it satisfies both companies with the results of the due diligence, they will sign a Merger Agreement, which is a binding contract. The final step is to obtain approval from the shareholders of both companies and the regulatory agencies.
If all goes well, the merger will be completed and the two companies will become one.
Know What Is Acquisition vs Merger
Acquisition vs merger is two different approaches when it comes to business. You must know what are they before you consider having them in your business.
Learn their advantages and disadvantages or even their procedure on how it’s done. With this, you will be able to choose what is best for your business.
To learn more, don’t hesitate to check out the rest of our blog posts.