The terms ‘mergers and ‘acquisitions’ are often used interchangeably in business incorrectly. It’s time to learn the key difference between an acquisition and a merger.
These strategies are both used to achieve synergy within and between organizations to increase competency and efficiency. However, they differ in intention, initiation, procedure, and outcome.
Read our guide to learn more!
Mergers and Acquisitions: A Guide
When mergers and acquisitions (M&A) occur, they join the two forces of businesses to become one. It’s almost comparable to two people getting married and combining two separate lives.
Just like marriage, the terms of joining may differ for businesses. It’s a tedious process in both cases that requires commitment and acceptance of change.
The Difference Between an Acquisition and a Merger
A merger is when two businesses decide to join their assets under one new company name. Oftentimes, the two separate companies will cease to exist. Thus, the final combined business is the new legal entity.
An acquisition, on the other hand, is when one company buys the assets and ownership from another business. The business that has been acquired does not have to change its name or structure per se. However, it is now owned by the parent company.
Why Should Businesses Merge or Acquire?
Businesses will decide to merge or acquire other businesses for various reasons. Here are the top four:
- Create synergy
- Achieve capital growth
- Improve supply-chain pricing power
- Eliminate competition
Synergies are achieved when the performance of activities improves and costs drop. This occurs because businesses leverage the strength of the other.
Growth can occur by growing market share without a ton of effort. If a business buys one of its suppliers or distributors, it can increase supply-chain pricing power and eliminate costs.
Finally, if a business acquires or merges with a business in their industry, they essentially eliminate future competition and have a greater share of the market.
How Do You Determine the Value of a Business?
In both mergers and acquisitions, both sides need experienced managers to negotiate the business value. This helps understand the amount of ownership each business receives (for mergers) or the purchase price (for acquisitions).
Since both businesses may perceive value differently, objective values are used to fairly compare businesses in an industry. Here are some examples of metrics:
- Comparative ratios
- Price-earnings ratio
- Enterprise-value-to-sales ratio
- Replacement cost
- Discounted cash flow
Once the value of the business has been determined, a strategy is needed for business acquisition financing. It’s quite common for a public business to use equity financing, for example, as a form of payment in M&As.
Guidance for Success in M&As
After an M&A occurs, some businesses may find great success while others can fail pretty spectacularly.
That’s why most businesses benefit from an intermediary or a consultant to handle the merger or acquisition. This consultant should know the business industry thoroughly and be able to support procedural training. An outside perspective also helps avoid bias.
Are you looking for business consulting services? Head over to our services page for an overview. We’re experts in guiding your business through processes like M&A, investment strategies, and more.