According to EY, UK’s financial service industry picked up in 2024 with a 26% year-on-year increase contributing to a total of 380 M&A deals.
Mergers and acquisitions hold utmost importance to drive business growth in today’s immensely competitive markets. While both are pivotal for firms, they differ significantly in terms of purpose, execution and structure. This blog explains the difference between mergers and acquisitions and outlines critical factors associated with each.
What is a merger?
A merger is a legal process of combining two or more companies to work as a single and more powerful entity. It forms a new structure and most likely includes several members from each of the companies involved in the process.
Mergers are formed to increase market share, access new technologies and reduce business costs.
According to the Office of National Statistics of UK(ONS), in the third quarter of 2024, there were an estimated 436 domestic and cross-border M&A transactions involving UK companies.
What is an acquisition?
Acquisitions do not involve a formation of a new company. Instead, a larger company acquires a smaller company with its assets becoming part of the larger company. These are often known as takeovers. The parent company takes over the operational decisions of the acquired company and ostensibly holds absolute power over the other.
Acquisitions are also formed to increase market share however there can be negative connotations especially when the smaller company is acquired by force. Other reasons for acquisitions include gaining competitive advantage, diversifying product offerings and bolstering the company’s position within the industry
How do mergers differ from acquisitions?
Mergers and acquisitions differ in the following ways:
Purpose
Merger: The key purpose of a merger includes achieving synergies between companies, minimising costs in running businesses and matching synergies to gain a scaled economy. The merged companies aim to elevate their market share and enter new markets to diversify business reach.
Acquisition: An acquistion entails attaining a competitive advantage in the market. The purpose of the acquisition is to destroy the competition and diversify product and service offerings. Mainly, the acquiring company purchases what it lacks in-house in its business process. It can be technology or any other value-generating asset like a skilled workforce.
Ownership
Merger: Ownership in the merger is distributed among the stakeholders of the merging companies. This is done under a shared management system where stakeholders make important business decisions such as board member composition, formation of deal structure, management retention and corporate culture alignment.
Acquisition: In acquisition, the acquiring company takes complete hold of the operations and assets of the acquired or target company. The acquiring company holds total ownership. This typically includes asset control, contractual rights and equity ownership.
Process
Merger: A merger pertains to the consolidation of two or more companies into a new firm, and in this process, companies enter the deal voluntarily. Resources of the merging companies such as equipment and machinery, contracts and agreements, client relationships and customer relationships are merged along with the exchanging of shares.
Acquisition: An acquisition mostly takes place to gain strategic advantage including broadening product and service offerings. The acquired company is normally completely absorbed by the acquiring company which takes full control on its operations.
Legal and financial structure
Merger: Merger has a complex legal structure as it requires regulatory oversight and extensive shareholder approval to combine and form a new entity. It needs detailed regulatory scrutiny, new tax registration and re-registration of the newly formed company. The financial assets of the consolidated company is reshuffled to create a combined and complete entity.
Acquisition: The legal and financial structure of an acquisition is relatively simpler because the acquiring company buys the stocks or assets of the target company which involves direct financial transactions and comparatively simpler legal scrutiny.
Size
Mergers: Mergers mostly happen with companies that have similar market capitalisation and size. Merging companies consolidate with the goal of establishing synergy, share control and equal partnership.
Acquisitions: In acquisitions, the larger company acquires the smaller company. The larger company absorbs the smaller one using its resources and gains total control over it. It does this by buying the smaller company’s assets or shares. Sometimes, the smaller company operates as a subsidiary of the larger company.
Brand identity
Mergers: Companies that are combined lose their identities and build a fresh identity under a newly merged one. Activities such as rebranding, cultural and operational integration and customer transition are key parts of forming brand identity in mergers.
Acquisitions: Often, the acquired company operates under the acquiring company’s brand name and identity. Gradual brand transition, customer retention, brand loyalty and mostly complete rebranding of the acquired company are the key undertakings of the formation of brand identity in acquisition.
Management
Mergers: The merged company operates under joint management with stakeholders' involvement and takes shared decisions in running the company.
Acquisitions: The acquiring company is mostly dominant over the acquired company and makes major management decisions. Typically, there is no scope for joint decision-making in the acquisition process.
Detailed differences between mergers and acquisitions
The above list discusses the main differences between mergers and acquisitions in their individual process. However, the table below goes into more details:
|
Sl. No. |
Parameter |
Merger |
Acquisition |
|
1. |
Process |
Two or more companies merge with one another to form a new firm. |
One large company completely takes over a smaller one. |
|
2. |
Decision |
A merger is formed with the mutual decision of each company. |
Acquisitions are not always formed by mutual decision. This is known as a hostile takeover. |
|
3. |
Brand identity |
The merged companies operate under a new name and brand identity. |
In most cases, the acquired company uses the parent company’s name and operates under it. |
|
4. |
Size |
The merged companies are of the same or comparable size and financial stature. |
The target company is smaller and less financially stable than the parent company. |
|
5. |
Ownership |
The ownership is divided among stakeholders from the combined companies |
In most cases, the acquiring company completely controls the acquired company |
|
6. |
Shares |
The merged company issues new shares |
No new shares are issued |
|
7. |
Purpose |
To achieve synergies in terms of increasing market share and expand reach. |
Acquisitions are formed to reduce competition and gain strategic advantage in the business. |
Which is better, merger or acquisition?
There are important factors to consider before deciding on a merger or acquisition. These include financial health, long-term planning and the business goals of the company. The key points to consider are as follows:
When should a company opt for merger?
When there are two or more companies of the same size and market share, looking to collaborate and increase growth, then a merger may be a good choice. The conditions favouring a merger are as follows:
- Companies have the same vision for the business’ future.
- Involved companies want to consolidate to reduce competition in the market.
- When interested companies aim to diversify their product/service offering and leverage the best resources to achieve this.
- When companies desire shared ownership instead of taking control of the other company to ensure shared growth and benefits.
When should a company opt for acquisition?
Acquisitions are preferred when a company aims for faster growth, market and industry dominance and access to resources that it lacks in-house. The conducive scenarios for acquisitions are:
- When a larger company wants to end competition from a smaller competitor and gain market advantage.
- In situations where a larger company lacks technology or value-adding assets for business. So, instead of beginning to develop or acquire desired capabilities from scratch, it acquires another smaller company which already has these attributes.
- When the company is aiming to elevate its financial position, it can acquire a smaller competitor company to achieve faster revenue growth and expand its product or service offerings.
How OneAdvanced Financials helps during mergers and acquisitions
Financials is a scalable cloud-based solution which can easily adapt to financial requirements post M&A. It supports easy integration with existing software and helps to automate workflows reducing manual integration requirements.
Financials also provides real-time insights into cash flow and makes it easier to analyse the financial health of the combined company. Moreover, the software supports forecasting and asset and inventory management, allowing the company to streamline its overall financial operations.