Merger vs. Acquisition: 9 Critical Differences You Need to Understand for Business Growth

Aug 17, 2022

When it comes to growing your business, you may be wondering whether a merger or an acquisition is the right move. While both can be beneficial, there are crucial differences between them that you should consider before developing and executing a strategy. Read on for a closer look at the differences so that you can make the best decision for your business.

Definition: What are Mergers and Acquisitions?

A merger occurs when two companies combine forces to become one company. This usually happens when both companies believe they can do more jointly than separately. With a merger, both companies involved often maintain their autonomy and operate as separate divisions within the new company.

On the other hand, an acquisition happens when one company buys another company outright. The acquiring company may then decide to absorb the acquired company entirely or make the acquired company a subsidiary, among other options.

Nine Key Differences Between Mergers and Acquisitions

1. Finances

One of the most significant differences between mergers and acquisitions is how they impact the finances of the businesses involved. In a merger, both companies combine their assets and liabilities. This means that they become one company, and each company takes on a share of the new company’s equity and debt. However, in an acquisition, only the acquiring company takes on the acquired company’s equity and debt. The acquiring company takes on full responsibility for the acquired company’s operations and finances.

2. Day-to-day operations

In a merger, both companies combine to form a new entity. This new entity may decide to adopt one company’s operations over the other, keep the operations of the two companies entirely separate or something in between. Typically, the newly formed company will work to optimize the strengths of the formerly separate entities and attempt to reduce inefficiencies. In an acquisition, the acquiring company assumes the acquired company’s operations and may or may not decide to implement aspects of the acquired company’s operations.

3. Taxes

Another important consideration when looking at mergers and acquisitions is taxes. In a merger, both companies involved are typically able to take advantage of tax breaks. Ultimately, this can help to offset some of the costs associated with the union and is a reason that the structure of the combination is an important consideration. In both mergers and acquisitions, there can be a mix of cash, debt or stock to finance the transaction. Each option provides unique advantages and disadvantages and should be carefully considered when structuring the transaction.

4. Leadership

Leadership is another important factor to consider. In a merger, leadership is typically shared between executives from both companies. It is essential that businesses take this into consideration before deciding on a merger. In contrast, in an acquisition, the company’s leadership is usually replaced by executives from the acquiring company.

5. Employees

Similarly to company leadership, employees are also impacted by mergers and acquisitions. Typically, in a merger, employees from both companies become employees of the new company. In order for the merger to be successful, company leadership should take the necessary steps to positively join the two teams. However, in an acquisition, the acquired company’s employees usually become employees of the acquiring company.

6. Regulatory Approval

Another important implication of mergers and acquisitions is the need for regulatory approval. Both mergers and acquisitions that meet a specified threshold of deal size (roughly $100mm) are subject to approval by the Federal Trade Commission (FTC). The FTC will review transactions above a certain size to determine if the transaction will breach antitrust laws, prevent competition or create a monopoly within the industry.

7. Products and Services

Generally, in a merger, both companies’ products and services are usually retained. On the other hand, in an acquisition, the acquiring company may choose to discontinue some or all of the acquired company’s products and services. In some cases, an acquiring company acquires another company for a specific product or product line. In this case, the acquiring company may integrate this specific product into their product offering while discontinuing the rest.

8. Agreement

In addition, another key difference to evaluate is the tone of the agreement. A merger is typically a friendly agreement between both companies. On the other hand, an acquisition can be hostile, with the acquiring company seeking to take over the acquired company against its will. However, an acquisition can still be a friendly and mutually beneficial, especially if the acquired company was looking to sell.

9. Culture

One final difference to consider, when deciding between a merger or acquisition, is company culture. Culture impacts the overall functionality of the company and a positive culture can lead to growth in many areas of the business. When two companies merge, they have to work to develop a new company culture that combines the best of both businesses. This can be a challenging task — when companies with different cultures are joined, it can be difficult to make decisions quickly and, properly, and challenging to operate efficiently right away. In acquisition, the acquiring company typically imposes its culture on the subsidiary. However, the acquiring company must still take care and caution in ensuring a smooth integration and transition for all parties involved in order for the transaction to be a success.

Final Thoughts

Whether you are looking to grow your business through a merger or an acquisition, it is essential to understand these critical differences. By learning about each process and what is involved, you can decide which route will be best for your company.

So, which option is right for you? That depends on your specific situation and what you hope to achieve by growing your business. A merger may be the right choice if you want to maintain your autonomy but still gain some financial and operational benefits from teaming up with another company. Although, if you’re looking to take over another company or expand your operations quickly, an acquisition may be better.

No matter which route you choose, it’s essential to do your homework and ensure that the growth strategy you pursue is the best for your business. At Tobin & Company, we have decades of experience helping companies achieve their growth goals through mergers and acquisitions. We would be happy to discuss these processes with you in further detail and help determine which option is right for your business. Contact us today to get started!