While the two concepts may have some similarities, critical differences between a merger and acquisition are essential to keep in mind. Yes, they both suggest the coming together of two companies. However, beyond this basic framework, the two terms diverge in meaningful ways. The resulting company’s primary difference can be seen. In other words, a merger is when two organizations come together and form a new entity, whereas, in an acquisition, one company is acquired by another and is thus absorbed by the acquiring brand.
Let’s say, for example, Company A buys out Company B. There would effectively be no more Company B as it is now absorbed into Company A, or Company B would operate under Company A as the flagship brand. As when Disney acquired Pixar, for example. In this instance, an acquisition has taken place. On the other hand, if Company A and Company B agree to merge and create a new legal entity as a newly merged company, this would be considered a merger.
What You Need to Know About Mergers
The basic premise entails two businesses coming together and forming a new business. The two separate companies that formerly existed pre-merger would now be dissolved in this scenario. What remains is the combined organization. Given that the companies are coming together (versus one being bought out by the other), mergers are generally considered a social venture between the two organizations in question.
In a merger, the combining of companies is usually beneficial to both. For instance, Company A may need to expand its market reach, while Company B is struggling a bit financially and can benefit from what Company A can offer in this respect. The merging of the entities truly is a win-win in most situations.
When a merger does take place, a new management structure has to be formed. This will often incorporate existing leadership from both companies; in some cases, the new company might hire outside people to helm the newly developed business.
As far as what is at stake in a merger regarding the business’s shares, these will usually be divided between the previously existing parent companies. Any negotiations generally center on how such claims will be divided up.
When a merger happens, the companies coming together give up some individual control. However, what they stand to gain tends to outweigh the negatives associated with any power loss. This is often why a merger gets proposed.
What You Need to Know About Acquisitions
Unlike a merger, an acquisition tends to be less friendly; that is to say, there can be an element of hostility involved. In many cases, the acquired company is not necessarily happy about the situation—thus the term “hostile takeover.” Sometimes the two terms—mergers and acquisitions—do get conflated. It happens that a “merger” will be used in an acquisition case to avoid negative connotations otherwise connected to the concept of an acquisition.
Some of the more common reasons an acquisition might occur are:
– A company wishes to expand its portfolio
– They want to rid the playing field of a competitor
– They wish to eliminate the need for a specific supplier and assume that particular capacity in-house
– They’re trying to acquire important assets necessary for the further development of the company
As an acquisition entails buying out another, the negotiation process usually centers around the purchase price. Acquisitions can be pretty costly, which is why many companies looking to acquire another get some form of business financing to secure the cash necessary for the purchase.
In either scenario, merger or acquisition, negotiations are a crucial part (not to mention a potentially delicate part) of the process. Ensuring that everyone is happy or satisfied given the circumstances is essential to ensure a seamless transition—from one company operating alone to a combined company structure. There may be some hiccups initially. A learning curve is inevitable as the two joined entities strive to work together for the good of the new business. This is to be expected. However, if done right, the resulting business model can position itself for success.
First Union Lending Can Help
If you consider purchasing another company or merging with a business, we have the funds you need to ensure a more seamless transition. Our job is to help smaller businesses grow. This is one way to ensure that your business is on track for growth. We offer short-term loans, lines of credit, and SBA loans, among other financing options. Call today and let’s get started together!