Startup Guide: Merge or Acquire? 2 years ago

While some businesses are busy competing to maintain their success, others keep taking advantage of every opportunity they can.

One of those opportunities is the potential for corporate mergers and acquisitions.

You've probably heard about 'merge' and 'acquisition' from large companies you see in the news. But you need to understand what they mean and why it is done in the first place.

What is the Difference Between Mergers and Acquisitions?

The combination of two or more commercial entities that require a rearrangement of their corporate structure is referred to as a merger or Acquisition. They seek to improve organizational efficiencies within the company to boost competence and productivity.

A merger is when two or more companies join forces to form a new company. With that, New shares are issued by the combined business, and existing owners of both companies receive a proportionate share of the new shares.

For example, Time Warner was in the entertainment/content business, and AT&T was in the cable business, even though its primary business is a landline and wireless broadband transmission. Working together through a merger would create fresh goods for AT&T's upcoming 5G network. Customers would benefit from the merger with lower costs and new entertainment designed for mobile devices. 

The Acquisition involves one company buying the assets of another–A more successful company will typically purchase a smaller and financially weaker company, and no new shares are issued.

An example is when Marvel struggled in 2009 to raise a third of its budget from selling overseas distribution rights and to finance some of its most important films. Until Disney acquired Marvel for $4 billion, and this is to accelerate the release of films starring Marvel characters, including commercial smash hits like "The Avengers" (2012)

Why is it done?

Merging is usually done to grow market share, break into new markets, cut operational costs, boost revenue, and increase profit margins. 

Meanwhile, acquisition is done to gain a competitive edge. This includes new niche offerings and diversification.

How is it done?

For Acquisition, the decision doesn't have to be mutual to control the target company completely. There are two options on how to do this.  First, there is what is known as a stock purchase agreement or asset sale, where all the assets or the shares are sold. The acquirer must own a majority or at least 51% of its shares. Then, a hostile takeover occurs when a firm takes over the operations of another without the latter's approval.

In most cases,  Mergers happen when two firms come to an arrangement whereby the parties involved must mutually agree. One will purchase the other's common stock from its shareholders in exchange for its common stock.

These will usually include variations of share transfers, deeds of assignment, share purchase agreement, and other closing documents.

What happens to the company?

In a Merger, the parties are usually of similar stature, size, and operational scope. The merged company now goes under a different name, and the power between the involved companies has been diluted.

In Acquisition, the acquired company usually takes its parent company name for its operations. However, in some circumstances, the acquirer may allow the former to keep its original name, and the acquiring business controls the acquired business completely.

There are numerous reasons for a company to acquire or merge with another company, and the most common reason is expansion. 

When it comes to achieving a company's long-term objectives, acquisition or merging with another business might be a wise investment because diversity gives them an advantage.  

However, a merger and acquisition in business is a distinct procedure, and several things have to be considered. To further understand the best procedure for your business, you may consult with our legal experts.