Mergers and acquisitions are two common corporate restructuring strategies that businesses use to increase corporate value and maximize profit. It’s not uncommon to find both terms used interchangeably in the business world. However, mergers and acquisitions are far from being one and the same. In fact, the difference between merger and acquisition (M&A) is quite distinct – in many ways.
To help you better understand the differences between merger and acquisition, we take a closer look at both terms.
The Difference Between Merger and Acquisition
Despite having the same end result – the joining of two companies – the difference between merger and acquisition is quite obvious. Once you know what to look for, of course. Here are the top difference between mergers and acquisitions:
A merger is when two separate companies voluntarily and equally - for the most part - fuse together and become one new company.
An acquisition is a process where one business entity buys and takes over another entity, typically by purchasing it.
Easy, right? Let's dig in a bit further:
Mergers are considered to be a more friendly corporate restructuring strategy. This is because they are voluntary and mutually beneficial for both companies involved.
In contrast, acquisitions generally carry a more negative connotation because the term entails that one company completely consumes another. To distance themselves from this negative connotation, many companies that acquire – or take over – smaller companies refer to the acquisition process as a merger. This is why the terms merger and acquisition often end up being used interchangeably, even though they are actually different. In fact, the same thing happens with layoffs and firings. The two terms are very different, yet a lot of people just use them interchangeably.
It’s important to note, however, that acquisitions aren’t always hostile and may be implemented voluntarily. It all gets a bit muddled, largely depending on how the event is carried out.
During a merger, a new company is formed under a new name. On the other hand, an acquisition does not require the formation of a new company. Instead, the acquired company uses the name of the acquiring company.
Again, though, there are exceptions. Sometimes a company is acquired by another company and allowed to keep doing business as usual. Back in 2002, eBay bought PayPal for a whopping $1.5 billion. PayPal continued being PayPal and was quite separate from eBay, though PayPal was technically part of eBay.
For merging companies, the purpose of this type of corporate restructuring is to decrease competition and increase operational efficiency. For an acquiring company, the goal is to stimulate instant growth or to complete their supply chain.
The eBay example makes this perfectly clear. eBay lacked a great way for customers to checkout with their purchases. PayPal solved that problem. Instead of trying to compete against PayPal with their own POS technology, eBay simply bought PayPal.
The size of merging companies is roughly the same, while the size of acquiring companies is greater than the size of acquired companies (again, this is just a rule of thumb - all sorts of things happen).
Merging companies typically have equal say when discussing the terms of the corporate restructuring. Therefore, you can say the power-difference between the merging companies is nil. On the other hand, acquiring companies have more power and thus get to dictate the terms of the corporate restructuring.
One of the key takeaways that should be noted here is that most mergers and acquisitions fail because they cannot integrate properly. Whether it's because of a clash of cultures or a mismatch of talent, the results can be disastrous. Working closely with each other, organizations that are merging - by acquisition or mutual mergers - need to fully understand how their companies will interplay with one another, how teams will work, what the chain of command is, etc.
Since merging companies are corporate equals, both companies’ stocks are surrendered and a new stock is issued. But when a takeover takes place, there is no new stock. Instead the acquiring company’s stocks continue to be traded as usual, while the acquired company’s stock ceases to exist.
Reasons for Mergers and Acquisitions
There are numerous reasons why acquiring or merging with an established business is an attractive option for corporate restructuring. Here are the most popular reasons for mergers and acquisitions:
- Gaining a competitive edge
- Increasing proficiency
- Diversifying business processes
- Cutting redundant operation costs
- Surviving ever-changing market
- Acquiring skills and technology
- Accelerating growth
Types of Mergers
There are five types of mergers:
- Horizontal merger. Merging with competitors.
- Vertical merger. Merging with suppliers or customers.
- Market extension merger. Merging with a company that deals with the same product but operates in a separate market.
- Product extension merger. Merging with a company that deals with products that are related and operates in the same market.
- Conglomerate merger. Merging with a company that deals with unrelated business activities.
Types of Acquisitions
There are several types of acquisitions:
- Hostile takeover. The acquiring company takes over a company by going directly to company shareholders.
- Friendly takeover. The acquiring company takes over a company by negotiating terms with management.
- Buyout takeover. The acquiring company takes over a company by buying more than 50% of the company.
What Do Mergers and Acquisitions Mean for HR?
Mergers and acquisitions can be a stressful period for employees. It’s completely understandable. Employees don’t know what to expect. Will they still hold the same position after the two companies join forces? Should they expect any layoffs or furloughs? What about their employee benefits? Mergers and acquisitions bring a wave of uncertainty.
It’s up to HR to carefully facilitate this process to ensure a smart execution and a smooth transition. However, this is easier said than done.
There are various M&A challenges that HR need to address head-on, like:
- Communicating the M&A to employees. HR needs to pay close attention to how they communicate the merger or acquisition to employees. When communicating the M&A to employees, HR should go over the reasons for the change, explain how the M&A will affect employees individually, and provide feedback to any employee concerns. The way HR communicates will determine how employees react to the merger or acquisition.
- Assessing the corporate culture. No two companies are completely alike. One may be driven by a sales mentality while another focuses on innovation. Similarly, companies can differ in management styles, problem-solving methodologies, workplace structure, and in their overall business attitude. It’s up to HR to anticipate possible clashes between corporate cultures and take predefined steps towards a seamless integration.
- Considering workforce reductions. Employees caught in the crossfire of mergers and acquisitions should not have to suffer. If workforce reductions are inevitable, then HR should consider offering outplacement services to affected employees. This will help employees transition into a new role without tarnishing the company’s employer reputation. The sad fact of the matter is that RIFs and layoffs go hand-in-hand with events like this. You need to be prepared for them.
- Reviewing benefits. It’s common for businesses going through mergers and acquisitions to assess whether the move makes strategic and financial sense. HR is responsible for assessing the benefits structure of the other company and identifying potential problems. For instance, offering a health insurance package that will drain the budget or isn’t sustainable does not make financial sense.
- Motivating employees to stay. Some employees may not want to be a part of a company that has gone through an M&A. It’s up to HR to motivate key employees to stay. One way to motivate employees is to present short and long term corporate goals, outline development paths, and promote job stability.
- Delegating M&A leadership role. Did you know that 40% to 80% of mergers fail to meet objectives? A contributing factor to this high fail rate is inadequate leadership during M&A. HR needs to delegate this task to someone who is well-equipped for seeing it through successfully, beginning to end.
The Importance of HR in Mergers and Acquisitions
HR plays a critical role in corporate restructuring and is responsible for planning, executing, and finalizing M&A procedures. Here are some practices HR should follow during and after mergers and acquisitions:
- Identify leaders from both companies to lead the charge.
- Offer training to management teams to better impose changes.
- Explain new roles to employees in both companies.
- Hold orientation programs on policies, procedures, benefits, and performance management.
- Discover different skills and map them appropriately.
It’s up to HR to unify corporate values, guide employees through the transitional phase, and review management structures. A clearly defined M&A road map will help HR ensure this process runs more smoothly for all parties involved.