One of the most common misunderstandings in the business world revolves around the subject of mergers and acquisitions (known as M&A) and what these two words really mean. Many people use them interchangeably, as if they mean the same thing – but the truth is, there are significant differences between a merger and an acquisition.
In this enlightening guide, we’ll clear up the misunderstandings once and for all by:
- Learning what a merger really is
- Learning what an acquisition really is
- Finding out the pros and cons of both
- Examining some famous real-world examples
We’ll also provide you with some essential tips to help you if you’re considering a merger or an acquisition for your company.
What is a merger?
A merger refers to the consolidation of two businesses into one new entity, with subsequent restructuring of both management and ownership. Mergers are typically viewed as more ‘friendly’ than acquisitions – although they do have their own unique disadvantages and tend to be less common than acquisitions.
When a merger does take place, the stocks of both companies must be given up, and new stocks are issued for the new business created because of their consolidation.
Pros and cons of mergers
Mergers and acquisitions come with their own unique set of advantages and disadvantages, so it’s important you take these into account before you decide which avenue is best for your business.
Some of the most significant positives of a merger include:
- Market expansion without the need to spend large sums.
- The potential for flexibility when it comes to setting up the new structure.
- Scaling your services while cutting costs.
However, on the flip side of the coin, mergers also come with downsides, most notably:
- They can be time-consuming to organise.
- The integration of two companies will require very careful and nuanced management.
Poor communication can create significant problems for the firms involved.
What is an acquisition?
Where a merger refers to two companies joining to become one new one, an acquisition – in simple terms – is when one company takes over another.
As a result, acquisitions are commonly viewed (rightly or wrongly) as a more ‘hostile’ action, which is why some people prefer to use the word ‘merger’, even though it isn’t technically accurate.
Acquisitions are also known as takeovers and require significant sums of money to be completed, as one company is essentially purchasing another. A key point to bear in mind is that there are two main types of acquisition you can consider – an asset acquisition or a share acquisition. Asset acquisitions are generally less risky for the potential buyer, while a share acquisition offers more control.
Pros and cons of acquisitions
The acquisition process can be an ideal route for a large, well-established business to take to boost its assets and output in one fell swoop. By acquiring a smaller business with a desirable set of services and assets, the bigger firm can quickly scale up and gain an even firmer foothold in the market.
Let’s explore some of the pros and cons of acquisitions to help you make a more informed decision about whether this may be the most appropriate choice for your company. First, the pros:
- Acquisitions are less complex and time-consuming than mergers.
- Acquiring an existing company allows for easy entry into new markets.
- Acquiring a business also means acquiring their talent.
Now, let’s shine a light on the disadvantages of acquisitions.
- Acquisitions are a significant financial undertaking.
- The risk may not pay off, no matter how robust or well-known your companies are.
- Mismanagement of the process can cause serious problems and result in the destruction of value.
Real-world examples of the M&A process
Businesses of all shapes and sizes engage in M&A on a regular basis, no matter what market sector they occupy. However, it can be beneficial to examine some of the most high-profile examples, as these can serve as a valuable demonstration of how to do it correctly – and profitably.
Let’s take a quick look at some the most prominent recent mergers or acquisitions in the global business world.
Walt Disney and Pixar
One of the most famous examples of a successful acquisition is the purchase of Pixar by the Walt Disney Company back in 2006.
Of course, both companies were already world-renowned for their animated movies, but their working relationship had become plagued with difficulty. At the time, Walt Disney was
a distributor for Pixar’s films, but the company decided to acquire Pixar as a means of creating a new and more robust relationship that worked well for both parties.
Sure enough, following the US$7.4 billion acquisition, Walt Disney became even more dominant in the world of animated movies, while Pixar was allowed to continue to maintain its unique brand of creativity, shored up by Disney’s prodigious resources.
The success of this acquisition has been plain to see, represented by the release of such global box office hits as Frozen and Moana.
Google and Android
In 2005, Google made a strategic decision to acquire a relatively unknown start-up known as Android, which had been developing software specifically for mobile devices.
This acquisition was arguably one of the canniest business decisions Google has ever made and resulted in Android’s revolutionary software becoming the most used mobile operating system in the world. Chances are that you have an android mobile device on your desk at this very moment, along with billions of other people around the world.
Interestingly, no one knows how much Google had to spend to acquire Android, but whatever the sum, it was clearly worth the initial investment.
Exxon and Mobil
Finally, the merger between Exxon and Mobil in 1991 remains one of the most significant business deals to have been brokered since records began.
The merger of these two oil industry stalwarts took place at a time when crude oil prices had plummeted. Consequently, companies in the sector were desperately looking for ways to reduce their costs while still maintaining their foothold in the market.
Exxon and Mobil decided to merge – a business decision that was valued at over US$80 billion – and went on to become the biggest publicly traded oil and gas organisation in the world, a prominent position it maintains to this day. Not only that, but due to the success of the merger, both companies managed to reduce redundancies, expand their geographical reach, streamline operating costs and take advantage of new technology.
Final thoughts
As you can see from the examples detailed above, when done correctly, mergers and acquisitions can bring significant benefits to both organisations involved.
The key is to use your due diligence to decide which route is the most beneficial to your business. This is where a skilled and experienced business broker comes in – with their assistance, your merger or acquisition can proceed as smoothly (and, hopefully, as profitably) as possible.
Here at Harris Acquire, we pride ourselves on making the entire process as hassle-free as possible for both parties, so if you are considering embarking on a merger or an acquisition, don’t hesitate to contact us at 01926 757100 or Hello@harrisacquire.com.