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Understanding Merger & Acquisitions

The word “merger” actually means the merging of two organizations or companies into one while the word “acquisition” simply means that takeover or acquiring of something. Basically, merger and acquisition is also called sometime as M&A. The idea behind the combination of this two lies on the fact that the shareholder’s value is above than the sum of the two companies alone. Both of these terms are alternatively used but they have a slightly different meaning.

With regards to acquisition, this is the buying of an organization or company the other. It could either be a hostile takeover or a friendly takeover. Now in relation to the latter, executives of the companies are doing negotiations whereas in hostile acquisition, if the bidder keep seeking even if the company or the target is not willing to agree. Most of the time, bigger companies are taking over of the smaller companies. On the other hand, in some cases, smaller companies may be able to take over bigger businesses and only keep its name for new firms which is the outcome of acquisition. This kind of acquisition is otherwise referred to as reverse merger.

As for a merger however, this is when there are two organizations or businesses that have agreed to be just one; basically it is a mutual decision between both parties. In mergers as well, the organizations have agreed to become as one and continue to operate as one instead of two separate entities. Because of this, the newly merged company’s stocks will be issued and the stocks of old companies or its individual stocks prior to the merging will be surrendered. The merger could also be conglomerate or congeneric, horizontal merger or a vertical merger. It will all depend on the nature of the merging companies.

Now, if the two companies which that agreed to merge on are competing on a similar product line, then it’s said to be a horizontal merging. In case when the two companies have different product line and agreed to a merger in an effort to promote the products and enhance the overall value of the company, then it is called a vertical merger. At last, when companies don’t have like product lines and decided to merge, then this kind of merge is otherwise called as conglomeration merger.

Again, depending on how the merger is financed, it could be categorized as a consolidation merger or purchase merger. The former is defined as merger to which the company or target is bought by the bidder; the latter is then defined as merger to which a new company is established by means of bringing both firms together.

The type of purchase done will be a deciding factor whether the purchase will fall under acquisition or merger. The purchase may be hostile or friendly purchase but again, this alone would not be enough. Even if top management agreed on the fact that combination of the two firms are in favor of both, then the purchase will be considered to be a merger.

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