Mergers vs. Acquisitions

In the following article, we will discuss the difference between mergers and acquisitions and their real-world examples.

What is the difference between mergers and acquisitions?

Among the corporate world’s most frequently misinterpreted terms are acquisitions and mergers. Both terms often relate to the merging of two businesses. However, there are essential distinctions in their appropriate usage.

A merger occurs when two independent companies merge to form one new company. Acquisition, in contrast, means the takeover of one organization by another. One of the important reasons for acquisitions and mergers is to expand the company’s customer base and increase shareholder value or its market share.

Key takeaways

• The taking over of one whole organization by another is called an acquisition.
• A merger occurs when two independent organizations merge to form one new organization.
• The two words are now frequently used in connection with each other.

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Mergers

Necessary for the continued existence of the new company is the type of purchase: friendly (merger) or hostile (acquisition).

For two companies to lawfully merge, they must combine into one new ownership with a brand new management and ownership structure. Mergers don’t cost any money to accomplish but decrease the power of each company individually.

Friendly mergers of equals only sometimes happen in reality. It’s unusual for two businesses to profit from working together while two distinct CEOs are willing to surrender some control to achieve those advantages. When this occurs, the shares of both firms are forfeited, and new shares are granted in the new company’s title.

How to start a business?

Mergers are frequently carried out to lower operating expenses, enter new markets, and increase profits and revenue. Mergers often include companies of approximately identical scope and size and are consensual.

Acquisitions

An acquired firm does not become a new one. When an acquisition occurs,  the smaller company is frequently swallowed up and goes out of business, with its assets now being a part of the broader company. 

Contrary to mergers, acquisitions, also referred to as takeovers, often have a negative connotation. So, even if an acquisition is a takeover, acquiring companies may describe it instead as a merger. An acquisition occurs when one company assumes full operational management responsibility for another. The buyer must have a large sum of money for acquisitions of another company, but in doing so, they gain total control.

Note! Many acquiring companies title an acquisition as a merger, even if it is not the case, because of the negative connotation attached to the term.

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Real-world examples of mergers and acquisitions

Below are two real-world examples of mergers and acquisitions to help you better understand both terms.

Merger: Exxon and Mobil

Following the FTC’s clearance, Exxon Corp. and Mobil Corp. finalized a merger in 1999. Before the merger, Exxon and Mobil stood at the top two of the list of oil producers in the sector. The merged company underwent a significant reorganization due to the merger, which included liquidating over 2,400 petrol stations around the country. Exxon Mobil Corp. (XOM) remains the title under which the joint venture trades on the NYSE.

Acquisition: AT&T Buys Time Warner

The purchase of Time Warner Inc. by AT&T Inc. was finalized in 2018. This acquisition was challenged in court due to U.S. government interference to impede the transaction; however, in 2019, an appeals court upheld AT&T’s acquisition of Time Warner Inc.

Within three years of the transaction’s closing, the 42.5 billion dollar acquisition is anticipated to result in cost savings for the combined business of 1.5 billion dollars and revenue synergies of 1 billion dollars. AT&T announced in 2021 that it would make a spinoff from its Warner Media division by merging it with Discovery.

The bottom line 

You can easily distinguish between mergers and acquisitions now with the help of the detailed explanation mentioned above. Mergers are when two independent organizations form an alliance and work together, whereas acquisitions are when one organization takes over another. Knowing the difference between the two terms can help you navigate the business world.