Mergers and acquisitions - the difference explained

by Evan Davies, Chief Executive - QLD | |   Growing Your Business
Mergers and acquisitions - the difference explaineed

The words 'merger' and 'acquisition' are typically used hand in hand. However, in the true sense of the words, they refer to quite different things. Here we explain the key differences...

Merger means 'to combine', while an acquisition means 'to acquire'. A speaker at a recent Syndicate meeting presented insights into mergers and acquisitions.

What's a merger?

A merger is the amalgamation of two or more companies voluntarily to form a new company. It is the mutual decision of the companies involved. Often companies of similar size agree to integrate their operations into a single entity, with shared ownership, control and profit, with shareholders of the old companies becoming shareholders of the new company.

The usual reasons for mergers are to unite resources, consolidate strengths and weaknesses of each company, as well as removing trade barriers, lessening competition and gaining synergy. The types of mergers are:

  • Horizontal: between firms who operate in the same space, often as competitors offering the same good or service.

  • Vertical: between companies producing different goods or services for one specific finished product. A vertical merger occurs when firms, operating at different levels within an industry's supply chain, merge operations.

  • Congeneric: where companies are in the same or related industries but don't offer the same products. In this merger, the companies may share similar distribution channels, providing synergies for the merger.

  • Reverse: when a private company becomes a public company by purchasing control of the public company. Shareholders of the private company usually receive large amounts of ownership in the public company and control of its Board.

  • Conglomerate: between firms involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

What's an acquisition?

The purchase of a business by another is called an acquisition. This is achieved either by purchase of the company's assets or by acquiring ownership over 51% of its paid up share capital.

Usually, the 'acquiring' company is more powerful in size, structure and operations than the 'target'. An acquisition strategy can deliver instant growth, competitiveness advantage and expansion of operations, market share, and profitability. The types of acquisitions are:

  • Hostile: often referred to as a 'hostile takeover bid'. This is an attempt to take over a company without approval of the company's Board. When vying for control of a publicly-traded firm, the acquirer attempting the hostile takeover may proceed to bypass Board approval by purchasing enough shares to acquire a controlling interest in the firm, or by persuading existing shareholders to vote in a new Board which will accept the takeover offer.

  • Friendly: whereby target company's management and Board agree to a merger or acquisition. A public offer of stock or cash is made and the Board of the target firm will publicly approve the buyout terms. This may yet be subject to shareholder or regulatory approval.

  • Buyout: often referred to as a 'leveraged buyout'(LBO). The acquisition of another company using a significant amount of borrowed money to meet the acquisition cost. Often, assets of the company being acquired are used as collateral for loans in addition to the assets of the acquiring company. Leveraged buyouts allow companies to make large acquisitions without having to commit a lot of capital.

These days, mergers are less common than acquisitions due to extreme competition. In both merger and acquisition, there are advantages, e.g. taxation, synergy, financial benefit, increased competitiveness. There can also be disadvantages such as increase in employee turnover, clashing in the culture of organisations and others, but usually the benefits outweigh the negatives.

The CEO Institute was founded in 1992. It is now Australia's leading membership organisation for CEOs and senior executives. It provides a forum for over 1,000 Chief Executive members to connect and share their learning with each other. In 2011, The CEO Institute became the world’s first global certification body for CEOs, and in 2013, partnered with UNESCO in support of the "Malala Fund for Girls' Right to Education". In 2014, they began offering their programs globally.
The CEO Syndicate is an exclusive peer support network for CEOs. The first meeting of The CEO Syndicate program was held in Melbourne in June 1992. Offices were opened in Adelaide in 1996 and Sydney and Brisbane in 1997, with Perth launching in 2007. In 2015, the New Zealand office opened.
The Future CEO program is a certification course designed by the business leaders of today for the business leaders of tomorrow. The first Future CEO meeting was held in Melbourne in May 2012. In 2014, the "Future CEO Scholarship Fund for Women" was established, and continues to be offered today.

Membership of The CEO Institute is by invitation only. To register your interest click enquire.





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