Merger vs Acquisition: Meaning, Differences and Reasons
A merger happens when two companies combine to form a new entity, while an acquisition occurs when one company buys another. Merger vs Acquisition are used for growth, market expansion, cost savings, and gaining competitive advantages.
Merger vs Acquisition: In the business world, companies often look for ways to grow faster and become more competitive. Two common strategies used for this purpose are mergers and acquisitions. Though these terms are often used together, they have different meanings and outcomes.
Understanding the difference between a merger and an acquisition is important for students, professionals, and investors. Both approaches help companies expand their reach, improve efficiency, and strengthen their market position.
What is a Merger?
A merger combines two or more companies. They form a single, new entity. It is a mutual agreement. Companies are often similar in size. They join assets and resources. The goal is a stronger, more efficient company. Mergers aim for better market competition and cost savings.
What is an Acquisition?
An acquisition occurs when one company buys another. The acquiring company takes control. It controls operations, assets, and decisions. The buyer is usually larger. Acquisitions can be friendly or hostile. The acquired company often integrates into the buyer's structure.
Key Differences Between Merger and Acquisition
The table below shows key distinctions between these business strategies.
| Key Differences Between Merger and Acquisition | ||
|---|---|---|
| Feature | Merger | Acquisition |
| Definition | Two or more combine into a new company. | One company buys another. |
| Control | Shared among former shareholders. | Acquiring company gains full control. |
| Ownership | Divided among merged entity's shareholders. | Primarily with acquiring company. |
| Company Size | Often similar-sized companies. | Larger company buys smaller one. |
| Identity | Both companies form a new identity. | Acquired company keeps or loses its name. |
| Process Nature | Mutual partnership, usually friendly. | Can be friendly or hostile. |
| Complexity | Often more complex legally. | Relatively simpler financial transaction. |
What are the Reasons for Mergers and Acquisitions?
Companies choose mergers and acquisitions to achieve various strategic and financial goals. Below are the major reasons why firms adopt these strategies.
Market Expansion
Companies merge or acquire to enter new markets. This increases market presence. Acquisitions allow quick entry.
Economies of Scale
Mergers help save costs. They enable sharing resources and boosting production. This improves efficiency.
Diversification
Companies acquire others to broaden product lines. This reduces business risk. It expands services or market segments.
Acquisition of New Technology or Expertise
Buying another company provides new technology. It also offers intellectual property or specialized knowledge. This is a common reason for acquisition.
Market Share
Mergers and acquisitions increase market share. They reduce competition. This strengthens a company's market position.
Development of Synergy
Synergy means combined entities perform better together. It uses resources more effectively. Complementary strengths boost overall performance.
Tax Benefits
Firms merge or buy others for tax advantages. They might use the acquired firm's losses. This can reduce taxable income.
Strategic Reorientation
These actions help companies change business direction. They shift focus based on market demands.
Elimination of Competition
An acquisition removes competitors. This allows the acquiring company to control prices. It can improve profitability.
Brand Value Improves
Mergers or acquisitions can enhance brand value. This improves goodwill. Both companies gain reputation and customer loyalty.