Have you ever heard of mergers and acquisitions? Many new people in the business world often misunderstand this term and what it entails. Others may only have a surface-deep level understanding. Simply put, mergers and acquisitions is the general term describing the process of combining two business entities into one. Here’s what you need to know.
What is the difference between mergers and acquisitions?
Mergers and acquisitions, or M&A, is the umbrella term for the consolidation of two companies. However, there is still a difference between a merger and an acquisition. These two terms, when used on their own, are not interchangeable. A merger occurs when two businesses combine into a new, third legal entity. On the other hand, an acquisition occurs when a company purchases and absorbs another company.
A merger usually occurs between two entities of roughly the same size. There is an amicable relationship between the two companies, and their respective CEOs must agree that this is the best strategic move for both sides. The companies may either choose a new name for their new company or continue using one of the existing company names. Both companies also have to surrender their old stock, as new stock must be issued under the name of the new business entity. This is why it’s important to ensure that both companies completely agree with the merger.
On the other hand, acquisitions occur when one company absorbs another. It can be a friendly takeover, which is the case if the acquired company agrees with and is willing to undergo the acquisition. If the acquired company did not want to be bought, however, the acquisition is then referred to as an unfriendly or hostile takeover. The acquiring company keeps its name as it absorbs the acquired company, which will cease to exist under its own name. The acquiring company would also own any previously owned assets of the acquired company.
What are the advantages and disadvantages of mergers and acquisitions?
M&A is a major decision a company shouldn’t take lightly. It’s important to be intimately aware of its advantages and disadvantages before you commit your company to a M&A transaction. Here are some of the pros and cons of M&A before you commit.
The advantages of M&A:
- It can lower labor costs. Each individual company has its own share of employees with similar or exact same roles as each other. When these companies merge into one, the newly formed company might end up with redundant employees. Eliminating these employees can reduce the new company’s labor costs and create a more efficient team.
- Enjoy more financial resources. Pooling the financial resources of both companies together increases the new company’s financial capacity. A larger budget coming from both companies opens many opportunities for investments that weren’t available before.
- Increase the company’s distribution capabilities. A merger or acquisition may help the new company expand geographically, making it easier for it to reach newer markets. This can speed up the company’s overall growth and improve its reputation.
The disadvantages of M&A:
- An acquisition might lead to large expenses. Buying a company is a huge expense, and these expenses will only grow if said company doesn’t want to be acquired. Make sure you have the resources to acquire a company before you take any steps.
- It can result in huge legal costs. In the same vein, merging two companies or acquiring a company is considered a significant legal transaction that requires the counsel of lawyers and financial professionals. Buying a company, especially one that doesn’t want to be acquired, may result in even bigger legal costs.
- You could potentially lose out on some opportunities. Bringing two companies together requires a lot of time, effort, and resources. This process can force the businesses to skip out on other future opportunities. However, if a company doesn’t want to let said opportunities pass it by, it can allocate its employees correctly so that some can oversee the merger while others can work on the other opportunities.
We hope that you keep this information in mind as you determine the best strategic move for your company. We wish you luck on your business endeavors!