Mergers and acquisitions are prime drivers of corporate growth. It’s often through a merger or takeover that a small business can transform into a larger one. By merging with a larger entity, a small business can boost its market share, increase sales revenue, and diversify its product lines. Yet mergers and acquisitions (or takeovers) differ in how they work. What is a merger, what is a takeover, and which one is best for your business? We’ll take a closer look below.
What is a merger?
We’ll start by looking at mergers. A merger in business occurs when two companies decide to join forces and become a single entity. To qualify as a merger, both companies are usually seen as equal in terms of value. A merger provides substantial advantages to both parties, cutting costs and streamlining operations to increase shareholder value.
One example of a successful merger would be when two auto manufacturers, Chrysler Corp. and Daimler Benz, joined together in 1998 to form DaimlerChrysler. Both were successful manufacturers, but by joining together in a corporate merger it enabled both to access new markets.
When two companies merge, they must issue new shares. These are then distributed equally among existing shareholders of both companies.
We’ve described a typical merger above, but this action can be broken down into several categories or types:
Horizontal merger: Two companies in direct competition (both in products and markets)
Vertical merger: Two companies in the same supply chain
Product extension merger: Two companies in the same market with different products
Market extension merger: Two companies in different markets with the same products
Conglomerate merger: Two completely unrelated businesses merge
What is a company takeover?
A company takeover is also called an acquisition, and it works a bit differently. While mergers can be seen as the joining of equals, a takeover involves a larger company purchasing a smaller one. This is sometimes a mutual decision, but not always. When a larger company purchases a smaller business against its wishes, this is called a hostile takeover.
The purchasing firm buys the smaller company outright from its shareholders by offering a specific cash price per share. To take control of the target company, the purchaser must acquire at least 51% of the smaller business’s stock.
One example of a friendly takeover would be when Walt Disney Corporation purchased Pixar Animation Studios. The Pixar shareholders approved this takeover. In some cases, the smaller company is able to continue using its original name, yet in others it will need to operate under the larger company’s name. For example, when Amazon took over Whole Foods Inc. in 2017, it allowed Whole Foods to continue operating using its original name.
As with mergers, there are a few different types of takeovers to be aware of:
Reverse takeover: a type of acquisition under which private companies gain public company status
Friendly takeover: The Board of Directors and shareholders give consent to the takeover
Hostile takeover: The board rejects the acquisition offer, yet the company continues its takeover
Differences between mergers and takeovers
As you can see from the definitions above, there are a few key differences between mergers and takeovers.
Mergers involve two or more equals, while takeovers involve one larger company that takes over a smaller company.
Mergers are always agreed upon using mutual consent, while acquisitions may or may not be friendly.
Merged companies choose a new name, while acquired companies often use the parent company’s name.
Merged companies issue new shares, while no new shares are issued in a takeover.
The benefits of mergers and acquisitions
There are several advantages to merging or agreeing to an acquisition, particularly for small businesses that wish to expand their reach. Here are the main benefits:
Increase market share
Increase business size
Gain greater visibility
The bottom line
There are a few important distinctions between mergers and acquisitions or takeovers. Yet overall both offer similar benefits, both to larger companies and smaller businesses. Joining together with competition means that you can increase your power and standing within the market. The acquisitions process can be complicated, so be sure to read all the fine print before agreeing to any contract.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.