Have you ever noticed that mergers and acquisitions are often consolidated under one category on websites offering investment advice? Combining the two into a single unit is so common that the M&A acronym is frequently used and well understood in the business world. But truth be told, mergers and acquisitions are different.
According to Mezy, a Utah due diligence services provider, true mergers are rare these days. Regardless, the differences between the two types of transactions are important enough that it is worth learning about them, especially if big business is a field you are looking to get into.
Integration vs. Purchase
The best way to understand how mergers and acquisitions differ is to think in terms of integrating and purchasing. A merger is essentially an integration of two companies to create a new, single enterprise moving forward. A good example would be the merger between the NFL and AFL in 1966.
Prior to that merger, the two leagues were distinctly separate properties competing for TV contracts, fans, and a limited number of players. They integrated their operations to create an entirely new entity that could further expand and take advantage of the economics of scale.
By contrast, an acquisition is an outright purchase. There is no merging of dual entities to create something new. Rather, one business purchases the other outright through a cash sale, a stock acquisition, or combination of both. Disney’s purchase of 20th Century Fox in 2019 is a good example.
Mergers Create New Companies
The chief characteristic of a merger is that it creates a new company. Again, we can turn to professional sports to see this in action. As you may or may not know, professional baseball in the U.S. underwent a major reorganization in 2020. Major league baseball (MLB) took over control of minor league baseball in hopes of streamlining the sport.
As a result of the takeover, the many minor leagues that made up MLB’s farm system were disbanded. Groups of leagues merged together to create entirely new leagues that were more closely aligned geographically. As an example, the International League was one of the oldest minor leagues in the country. It merged with others to form the new Triple-A East league.
True mergers are rare these days because there is seldom justification for combining company assets, management teams, and workforces in hopes of creating something better. Baseball was able to do it only because of the monopolistic nature of pro sports. Disbanding the minor leagues and merging them to create new leagues makes baseball more efficient. Most other industries would not benefit from something similar.
Acquisitions Eliminate Companies
Where mergers create new companies, acquisitions eliminate them. Getting back to our previous example, 20th Century Fox no longer exists as a business entity. Disney acquired all of its assets. Disney re-branded some of those assets as 20th Century Studios for marketing purposes, but the old company is long gone.
Often times, acquired businesses become subsidiaries of their buyers. There are cases when it makes sense to continue using the acquired company’s brand, trademarks, etc. to take advantage of name recognition and brand loyalty. But other times, every mention of the old company is completely erased. It really depends on the buyer’s goals.
The one thing mergers and acquisitions do have in common is the need to conduct due diligence before proceeding. Due diligence provides all of the necessary information to help companies understand what they are getting into should they proceed. Beyond the common component of due diligence, mergers and acquisitions look completely different.