Mergers and acquisitions (M&A) are the buying and selling of different companies. They can be a result of two companies deciding to become one, or one company taking over another, explains Chase Pittman. M&A deals usually happen when one company is looking to grow through diversification or when they want to cut costs by eliminating duplicate operations.
Mergers and acquisitions are carried out for many reasons, but they’re most often done to create greater market share, form joint ventures, reduce costs through direct integration of the companies’ operations, reduce debt by acquiring cash-rich firms that may have lower long-term debt levels than the acquiring company, or to sell underperforming divisions.
Mergers and acquisitions are both deals in which one company acquires another. At first glance, the terms may seem interchangeable, but they actually refer to two different types of deals, says Chase Pittman.
What Is a Merger? Chase Pittman Explains
A merger is an agreement between two companies where one company will be absorbed by the other. There’s no new management or board of directors, just a change in ownership.
When a company has a strong market position and wants to expand its range of operations, it will often look to merge with an existing company in the same field, says Chase Pittman.
What Is an Acquisition?
An acquisition, on the other hand, is when one company buys another company with its own management team and board of directors. A company can acquire another company in a number of ways, but the most common is through purchasing the company outright.
When one company buys another company outright, they buy 100% of the shares and become its new owners. After an acquisition, the acquired company ceases to exist as its own entity and becomes a part of the acquiring organization.
Acquisitions are more common than mergers for big corporations because it allows them to use the acquired company’s resources to grow their business as well as to diversify their stake in a particular market or industry, says Chase Pittman.
For example, let’s say that Acme Corp wants to enter the pet care market. They could either purchase ABC Pet Care Company outright or they could merge with them and gain access to ABC Pet Care Company’s resources without buying it outright.
Mergers Versus Acquisitions
The difference between a merger and an acquisition is that a merger is when one company absorbs another company, while an acquisition is when one company purchases another company. In a merger, the companies work together and share the same management team and board of directors. In an acquisition, the acquiring company can retain or replace the management team and board of directors from the acquired company.
However, there are advantages and disadvantages to both mergers and acquisitions. If your business is considering merging with another company, it’s important to know which type of transaction you’re considering and the implications of such a decision, advises Chase Pittman.
Mergers allow two companies to come together under one name without having to change anything structurally about how they operate. But if this happens with a large corporation, there may be layoffs of employees from both sides in order for different departments to be combined within the new organization. Acquisitions can also result in layoffs, but this is less likely if the acquired company has similar operating procedures as the acquiring company.