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Sunday, September 24, 2023

Merger vs Acquisition: The Differences, Explained


The world of merger vs acquisition can be somewhat confusing to newbie investors. That’s because it’s not always obvious what the political or business motives are behind the decision.

Still, the M&A world is enjoying an uptick right now. In fact, the 2021 deal volume is over $4.3 trillion for the first three quarters globally. In this article, we look at the primary differences between mergers and acquisitions.

What Is a Merger?

A merger is when two companies come together to form a new entity. This usually comes with a name change. It’s a voluntary act done for a number of purposes with the full approval of all involved parties.

One of the many reasons a merger works well is it helps involved companies compete at a greater level than they otherwise could on their own. It also helps increase the available resources company-wide.

What Is an Acquisition?

A business acquisition occurs when one company purchases another company. It can be a voluntary transaction done with the full support of the owners or it can be more hostile. (The term “hostile takeover” technically refers to an acquisition.)

Acquisitions can make a lot of sense from both sides of a business transaction. In the next section, we’ll examine one of the biggest advantages from the parent company’s standpoint.

Acquisitions Help Speed Up Market Access

One of the great benefits of business acquisition to the parent company (or buyer) is that it speeds up their access to the market they’re entering. They don’t have to spend as much on research and development, which can be one of the largest expenses when entering a new market.

Mergers Can Increase Competitive Advantage

Mergers and acquisitions can each increase the competitive advantage that a company has. However, it seems to be spoken of a lot more with companies that willingly merge their resources.

Perhaps that’s because they each know their current market positions and acknowledge their limitations. Furthermore, it’s possible they see how the other company can fill those gaps in things like products, technology, or human capital.

Mergers Take Multiple Forms

Investing in a business through the merger process can take many forms. Some companies that merge share no common customers. Or, maybe they do but come at it from different angles.

Whether companies are selling the same exact product and simply looking to expand their customer base or they’re complementing each other, mergers set the emerging company up for success. They do this by combining their strengths for a shared cause.

Mergers and Acquisitions Increase Overall Value

If handled correctly, the purpose behind a merger or acquisition is to improve the value of the resulting entity. Parent companies that acquire a competitor take competition off the market while absorbing the qualities of that competitor. Merging companies band together to address shared challenges or position themselves better in their industries.

Understanding the Merger vs Acquisition Difference Helps You Invest Smarter

Understanding the divide of merger vs acquisition will help investors understand the market forces at play. It will also help them to realize whether a company will be coming out the other side in a position to succeed. For more business and finance tips, check out some of our additional posts!

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