Globally, there were almost 40,000 merger and acquisition (M&A) deals in 2023. It’s normal for us to combine these two types of deals into one handy phrase, and when all’s said and done, they accomplish the same thing, don’t they?

Well, in some ways, yes, but at the same time, no. Mergers and acquisitions both result in two companies joining together. They also start out with the same intention–increasing market share and boosting value for shareholders. However, they take different forms and are separate entities.

This post will explore the key differences between mergers and acquisitions and why they matter. We’ll also explore how to find the right software to make both successful.

Defining Mergers and Acquisitions

Mergers happen when two separate companies decide to come together to form a new business entity. In principle, it’s a friendly meeting of equals. Both sides are motivated to merge and feel it’s in the best interests of both companies and their respective shareholders.

Common types of mergers include:

  • Horizontal: A meeting of equals–two businesses operating in the same industry that are usually competitors. In industries with few competitors, mergers can result in synergies and a growth in market share. However, horizontal mergers are subject to intense regulatory scrutiny.
  • Vertical: These mergers bring together two companies operating at different levels within an industry’s supply chain. The goal is to improve synergies by working together.
  • Conglomerate: This type of organization merges businesses operating in different industries. While they do not impact market share or competition in their respective fields, they can result in product or market extensions.
  • Market extension: When companies offer similar products in different markets, they can join forces to broaden their market access and acquire more customers.
  • Product extension: Two businesses offering different products in related categories may merge to consolidate their product lines and reach a wider customer set.

Acquisitions occur when one business buys another. The smaller company is usually subsumed by the larger one and may cease to exist as an entity in its own right. The larger company acquires the smaller company’s assets, liabilities, and operations.

There are many types of acquisitions, including:

  • Friendly: The smaller company agrees to be taken over by the larger one. The acquisition must be approved by the target company’s shareholders, who may hold out until a fair price per share is offered.
  • Hostile: The smaller company resists the larger company’s attempts to take it over. This may happen if the directors feel the company is being undervalued or they do not agree with the acquiring company’s plans for the business.
  • Reverse: A way of becoming a publicly traded company without an IPO. Also called a back-door listing, it involves buying a controlling stake in a publicly listed company and exchanging the private company for shares in the public company.

Backflip: A rare type of acquisition in which the acquiring company becomes a subsidiary of the purchased company.

Key Differences Between Mergers and Acquisitions

Let’s look at four key differences that set mergers and acquisitions apart.

1. Management changes

Merger: A new entity with a new management structure is formed. This is typically comprised of a board of directors made up of directors from the former companies. For this process to go smoothly, give and take on both sides is needed, especially as one CEO may need to cede their position.

Acquisition: The smaller company often ceases to exist, and its management structure may be replaced, answering directly to the new owner. However, in some takeovers, the existing management structure is retained, allowing it to exist as a subsidiary that reports to its new owners.

2. Name changes

Mergers: They usually try to project the impression that they are a merging of equals, so they often take on a new name that combines the originals. 

Acquisitions: In traditional acquisitions, the name of the smaller company is often consigned to the past. However, this isn’t always the case due to the value the name can bring to the deal. When businesses continue to function as subsidiaries, they may retain their name and identity separate from their new owner.

3. Regulatory scrutiny

Mergers and acquisitions are subject to scrutiny at the federal and state levels. For example, the Federal Trade Commission (FTC) enforces Section 7 of the Clayton Act. This legislation prohibits mergers and acquisitions from substantially lessening competition or tending to create a monopoly.

Mergers–especially horizontal mergers–raise particular antitrust concerns. That’s why they have their own set of guidelines issued jointly by the FTC and the US Department of Justice (DoJ).

Acquisitions–specifically, series of acquisitions and acquisitions of competitors–are now subject to greater scrutiny under the 2023 Merger Guidelines.

4. Cultural shifts

Mergers: A merger may attempt to blend cultures as a union of equals. The goal of a merger is to enhance synergy, but this can take time as cultures fuse to become the new company’s identity.

Acquisitions: Retained employees in the smaller company typically have to learn a new culture, as the culture of the acquiring company is likely to dominate.

Sidebar: When a merger is really an acquisition

Muddying the water even further is the fact that many acquisitions like to style themselves as mergers. This is because the terms “acquisition” and “takeover” can have negative connotations businesses would rather avoid. 

That’s why the blended term “merger and acquisition (M&A) transaction” has become more popular in recent years. The business acquiring a smaller one doesn’t come off as a bad guy ruthlessly taking over another business for its own gain. 

It also dignifies the business being taken over. Therefore, it’s becoming increasingly difficult to differentiate the two terms as M&A deals become the new terminology for them all.

Why Mergers and Acquisitions Happen: Key Differences

Mergers and acquisitions can have similar outcomes in terms of strengthening market position, enhancing synergies, and expanding client bases. However, they typically start out with slightly different intentions.

Mergers are usually about increasing market share, reducing costs, and moving into new markets. By combining forces, the newly merged company may be able to forge a path that neither could have taken on its own.

Acquisitions may happen to lower production costs. For example, if you are a manufacturer, purchasing your supplier allows you to access raw materials at cost. This can reduce your cost per unit and boost your profit margin.

Acquisitions can also give you instant access to a greater market share or product range. You increase your assets and revenue streams and can look to streamline operations. An acquisition could also give your company access to the intellectual property of the other company, which could save years of research and development expenses.

Real-World Examples of Mergers and Acquisitions

Mergers: The biggest merger in history happened in 2000 when America Online merged with TimeWarner. This is now seen as a warning example of how not to carry out a merger. AOL was riding the dotcom wave at the time of the merger, and that soon came to an end. The merger lasted less than a decade, with both companies being spun off and run as separate entities. 

Other famous mergers include Exxon and Mobil, which successfully merged to become ExxonMobil in 1999, and HP and Compaq, which merged to become HP-Compaq in 2002. The fact that there are few examples of true horizontal mergers in recent years demonstrates that most recent mergers are, in fact, acquisitions disguised as mergers.

Acquisitions: Vodafone’s takeover of Mannesmann AG, completed in 2000, was the biggest acquisition in history. Vodafone paid $180.95 billion to acquire the German telecoms giant. 

Other famous acquisitions in more recent years include: 

  • 2023 – First Citizens Bank acquired Silicon Valley Bank
  • 2022 – Microsoft acquired Activision Blizzard
  • 2021 – Amazon acquired MGM Studios

Due Diligence in Mergers and Acquisitions

Whether you’re involved in a merger or an acquisition, comprehensive due diligence processes are essential to prevent deals from collapsing. It helps you see the deal from all angles, namely:

  • Identify liabilities
  • Evaluate assets
  • Check culture alignment
  • Assess financial implications

Due diligence requires the analysis of a huge amount of data, much of which is proprietary. In the past, this data would be stored in secure data rooms–physical vaults accessible only to authorized individuals. Now, they have been superseded by virtual data rooms (VDRs) that bring everything together for a successful M&A process.

The Best VDR for Mergers and Acquisitions

Due diligence is the time to strengthen deals, uncover dealbreakers, and pave the way for a prosperous union. The right VDR lets you bring together all the documentation needed for a successful M&A process. It facilitates communication, supports rigorous checking, and results in faster transaction times.

At CapLinked, we know mergers and acquisitions inside out. We have crafted the ultimate virtual data room to simplify every aspect of the due diligence process. Benefit from an intuitive dashboard, secure workspaces, and unparalleled control over your documents.

If you’re ready to complete the M&A process faster and with greater security, start a 14-day free trial of CapLinked today.