Mergers vs. Acquisitions: What’s the Difference?

Mergers and acquisitions are often mentioned together in corporate law in Miami, FL, and laypeople often assume the terms are interchangeable. However, they refer to completely different legal processes. Even if you do not run a company, chances are you work for one or buy products from them. That makes it important to know the difference—you will know what to expect if you discover your employer or favorite producer of consumer goods faces a merger or acquisition. Here are the differences.

Acquisitions

Mergers and acquisitions have the same goal: to make a business more profitable. Both of these options support growth and innovation. However, they do not work in the same way.

An acquisition is mentioned first because it is often easier. Basically, a company buys a major stake in another company. It is not always a larger company acquiring a smaller company, either—acquisitions may occur between equals, or a small, profitable company may acquire a larger struggling company to enjoy its market share.

Acquisitions are often called “takeovers,” which is a literal description of what occurs. However, the negativity behind it is discouraged, because it sounds like the acquired company gains no advantages from the transaction. Acquired companies often agree to these transactions, as they also help them grow.

A “tender offer” is a slightly different acquisition—it is a deal between shareholders to transfer a stake to another company. Unlike an acquisition, this transaction does not need approval from the board of directors.

Mergers

Companies may retain their original names with an acquisition, or the acquired company may become merely another branch of the acquiring company. Basically, sometimes the acquired company is absorbed completely into the acquiring company, and sometimes it is not. Mergers, though, have a completely new result.

When two companies merge, they create a new third business. The parties are normally equal in size and market share, but wish to expand in a new area of business. Once merged, they share in this new business.

A similar arrangement is consolidation. Unlike mergers or acquisitions, the companies do not blend resources or identities—they merely work as two partners in pursuit of new business.

Reasons for mergers or acquisitions

As indicated above, mergers and acquisitions are normally not hostile and involve enthusiastic participation from both parties. Companies looking to enter these transactions are likely seeking any of the following:

• Diversification: Companies may wish to expand their product offerings or enter a new market. By merging with or acquiring another company, these doors open. Companies may also wish to pursue “foreign diversification,” which is expansion into other countries.
• Finances: A large but broke company that is having difficulty adjusting to the 21^st century may readily allow acquisition by a smaller, more modern company in order to avoid bankruptcy. Or, a smaller company may require additional capital that is easily acquired by merging with a larger one. Basically, companies looking to improve finances consider merger or acquisition.
• Taxes: Different business entities enjoy different tax incentives. It is often easier to start an acquisition or merger than to change entity type. Also, an acquiring or acquired business may operate in a location with tax advantages.

If you require guidance in corporate law in Miami, FL, including mergers, acquisitions and business formation, contact Ruben J. Padron, PA today. Let us help you get your business off the ground!

Categorised in: Corporate Law