Merger vs. Acquisition - The Truth Behind Each Strategy

Choosing between a merger or acquisition can be overwhelming, even when you have had a robust exit strategy all along.

We have found that one is ideal for owners looking to exit fully, while the other is ideal for those looking to remain actively involved in business.

Here's a detailed merger vs acquisition guide to get you started.

TL;DR - Merger vs. Acquisition

Here's how mergers and acquisitions compare in terms of advantages and disadvantages:

Merger	Acquisition
A company combination that forms a new legal entity that's jointly owned while the individual companies are deserved.	A company combination where an acquirer purchases over 50% or all of another company’s shares and gains control over it.
Pros	Pros
You can merge faster as your business interests usually align because you consider yourself equal partners. The integration process is usually less involved and the transition is smoother.	Can fetch the selling company a higher sale price as the larger acquiring company may be willing to offer more. An outright sale gives you more control over the terms and timing of your exit.
Cons	Cons
You may lose control and some degree of autonomy over business operations and decisions after merging. Power struggles and incompatibility in business practices and cultures may sink the deal easily if not resolved.	The sale or exit process can be lengthy as more due diligence is required. Strict regulatory scrutiny by antitrust authorities can discourage potential buyers and make them leave the deal.
Best For	Best For
Ideal for owners looking to remain directly involved in business through the combined entity.	Ideal for owners looking to exit fully or get a portion of the acquiring company's stock but have no direct control over the company.

You don't have to choose between a merger and acquisition alone. The right industry-specific M&A experts can help you determine which option is best suited to your unique situation and needs.

At Exitwise, we can help you hire and work with the best M&A experts to achieve the exit you've always dreamed of. Schedule a consultation with us today to maximize your exit.

What is a Merger?

A merger is a combination of companies to form one new legal entity while the former companies cease to exist.

Mergers usually fall into different categories, depending on how the companies combine. The following are the main types:

What is a Horizontal Merger?

A horizontal merger is a combination where the target and acquiring company are in the same sector as direct competitors. They have the same services or products and target markets.

Horizontal mergers help merging companies expand market share, increase revenue, and reduce competition.

What is a Vertical Merger?

A vertical merger is a combination where the target and acquiring company are within the same industry but at different value or supply chain levels.

Such mergers increase revenue, improve operational efficiency, and provide more control over the supply chain.

What is a Reverse Merger?

A reverse merger is a combination where a private company purchases a public company, and the shareholders or owners of the private one now control the acquired company.

Companies use reverse mergers to go public without using the traditional IPO strategy, leverage the public company's brand, and access capital.

What Are Common Reasons a Firm Might Pursue a Merger?

A firm can pursue a merger for one or a combination of the following reasons:

As part of its exit strategy, if the owner or shareholders choose to sell out all their ownership stakes.
To diversify into new markets, geographic locations, products, or services.
To create greater value for the shareholders of the merging companies.
To transfer knowledge, technologies, and key talent between them.
To enjoy economies of scale through reduced operational, marketing, and production costs.

When you decide to sell your company, you can take either the merger or acquisition approach, depending on your business goals. We'll discuss acquisitions in the next section.

What is an Acquisition?

An acquisition is a company combination in which the acquiring company buys over 50% or all of the target company's shares to become the new owner.

Like a merger, an acquisition is a form of inorganic growth. The acquiring company achieves faster growth by acquiring or merging with others rather than using the longer route of organic growth.

What Are the Benefits of Acquisition?

Here are some benefits buyers enjoy when they acquire other companies:

Faster Growth: Buyers can achieve inorganic growth faster as they acquire more companies, saving them all the efforts that go into the traditional organic growth approach.
Reducing Costs: Buyers can enjoy economies of scale and reduced operational, production, marketing, and distribution costs.
Faster Diversification: An acquiring company can easily expand into new markets and products or services immediately after they acquire a company.

What is a Tuck-in Acquisition?

A tuck-in acquisition is a strategic combination where a larger company acquires a smaller one from the same or a related sector, absorbing it completely and integrating it within its platform.

The smaller company loses its former identity and accesses the larger company's technology, market, and resources without a significant change in the acquiring company's ecosystem.

Companies use tuck-in acquisitions to increase market share or gain access to certain resources of the smaller company, such as intellectual property or technology.

What is a Bolt-on Acquisition?

A bolt-on acquisition is a combination in which a larger company acquires a smaller one in the same industry without fully absorbing it.

Instead, it allows the acquired company to exercise its independence within its own department in the larger company.

Usually used by private equity firms, a bolt-on acquisition seeks to increase market reach, enhance existing portfolios with niche businesses, and add complementary services or products.

What Happens to Retained Earnings in an Acquisition?

Retained earnings are the profits you keep aside for your business to secure the future when times are uncertain.

When you sell your business through an acquisition, the retained earnings typically form part of the deal and transfer to the buyer's retained earnings.

The acquiring company merges the retained earnings and financial statements of the two companies to show the combined company's accumulated net profits.

Relevant Characteristics Between Merger and Acquisition

Here’s how mergers and acquisitions compare based on different characteristics:

	Merger	Acquisition
Purpose	Mergers mainly aim to increase market share and achieve potential cost savings and revenue increments.	Acquisitions aim to increase revenues, improve operational efficiency, reduce costs, and gain more control over the product or supply chain.
Size of Entities	The combining companies are usually similar in size and extent of operations.	The acquiring company is typically bigger and more financially advantaged than the acquired company.
Legal Status	Combining companies cease to exist individually and become a new legal entity.	The combining companies maintain their own legal statuses as separate entities, and the acquired one typically becomes a subsidiary.
Control	Merging companies have equal control and influence over the new entity's resources, decisions, and operations.	The acquiring company holds over 50% of the target's shares and thus controls key decisions, resources, and operations without the input of the other shareholders.
Stock Exchange	In a stock-for-stock exchange plan, the combining companies exchange their respective shares with the shares of the new entity to become shareholders in the new entity.	The acquiring company usually pays for the stock of the seller or shareholders of a target company. They may also give them some stock in the acquiring company.
Market Perception	Mergers generally receive more acceptance from the public because of innovations, lower product prices, and job creation. Investors like them because of potential synergy realization and increased profitability.	The public generally frowns upon acquisitions because they usually reduce competition, leading to higher product prices and job losses. Investors like them because they increase profitability and realize synergies.
Motivation	To make more profits and increase shareholders' value.	To make more profits and increase shareholders’ value.
Integration Process	Includes planning, forming a dedicated integration team, blending cultures, and identifying synergies.	Includes planning, forming a dedicated integration team, blending cultures, and identifying synergies.
Financial Structure	If a merger is structured as a cash consideration, the acquirer pays the “seller" and the target's shareholders in cash for their shares to buy out their ownership stake.	The acquiring company can pay using debt, equity, or a combination of both.
Regulatory Scrutiny	Mergers typically receive less scrutiny from antitrust authorities.	Acquisitions typically receive intense regulatory scrutiny because they are more likely to create market monopolies.

Similarities and Differences

Let's consider how the acquisition vs merger scenario plays out using the above characteristics.

Merger and Acquisition Differences

A company merger differs from an acquisition in the following ways:

Size of Entities: In a true merger, the merging entities are similar in size and scale of operations. The acquiring company in an acquisition is typically larger than the target company.
Control: The companies in a merger share equal control rights over the new entity. In an acquisition, the target company loses control after the acquirer buys over 50% of its shares.

Merger and Acquisition Similarities

Despite the differences, mergers and acquisitions are similar in some ways:

Both have the same motivation, which is to create value and increase profits for shareholders.
Both are methods of inorganic growth rather than the traditional route of growing a company from scratch.
They share common purposes, such as increasing market share, managing competition, and reducing costs.

How to Value Mergers and Acquisitions

Depending on the nature of the merger or acquisition, an M&A valuation can have two key approaches.

First, the acquirer can take the simple approach of using one or several methods to value a target company:

Most acquirers use the Discounted Cash Flow method to discount your company's projected cash flows to their present value.
Present value of the company = Total discounted cash flows + Terminal value

Secondly, your buyer can use the merger model to evaluate the deal in its entirety:

The process involves valuing each company separately.
The buyer then combines the financial statements of the two companies to see the effect of the acquisition or merger on the acquirer’s consolidated earnings per share.
You can expect the buyer to pursue the deal if the combined earnings per share will increase.

It can be challenging to calculate these valuations on your own. We can help you find the best industry-specific M&A experts to help you sell at the best price possible.

We'll help you hire and manage M&A advisors, investment bankers, wealth advisors, and finance accountants. These professionals can advise you on the best option between a merger or acquisition to protect your business goals and interests.

Consult with us at Exitwise today to optimize your business exit.

What About Merger vs. Acquisition vs. Consolidation?

A consolidation is an advanced type of merger where two or more companies join to form a new entity.

In both mergers and consolidations, the companies combine their assets and liabilities.

Some consolidations involve an acquiring company assuming the assets and liabilities of a target company, which gets dissolved while the acquiring company survives.

In an acquisition, the acquirer typically assumes the assets of the target company but doesn't assume the target's liabilities.

Bottom Line

Deciding between a merger or acquisition doesn't have to be difficult now. A merger is better if you want to remain active in business through the new entity.

An acquisition is better if you want to give up control and exit business operations completely.

You can also use an acquisition if your acquirer is willing to offer you shares in their company, but you don't have to be in direct control over any business aspects.

Frequently Asked Questions (FAQs)

Let's check out some common questions about the company merger vs acquisition topic.

Venture vs. Merger and Acquisition — What’s the Difference?

Mergers and acquisitions are long-term combinations that create a single new entity or allow one company to take control over another.

A joint venture is a short-term alliance between companies to execute a specific task, after which the venture is dissolved.

Merger vs. Acquisition vs. Takeover — What is the Difference?

Both mergers and acquisitions are typically friendly. A takeover is a less friendly combination where the acquirer forces the target's hand by buying a larger portion of the target's shares.

The acquiring company forces the acquisition because the target company's board of directors or management doesn't agree to the deal.

To work around this, the acquirer directly contacts the shareholders and persuades them to sell. The shareholders may also be encouraged to hire a new board that will agree to the deal.

Merger of Equals vs. Acquisition — How Are They Different?

A merger of equals is one where the combining companies are the same size and consider each other equal stakeholders.

On the other hand, the acquiring company in an acquisition is larger and exercises its superiority over the smaller target company.

What Are the Three Reasons That Acquisitions Fail?

Most acquisitions fail because of three key issues—incompatibility, poor integration, and poor employee handling after the transaction.

Incompatibility usually manifests as clashes in culture, values, operations, and business models.

Not planning the integration early leads to confusion, unrealized synergies, and separation when the combining entities can't work together anymore.

Failure to retain key leadership and employees for the first few years after the deal can also reduce the M&A success rate. Firing such employees often leads to a collapsed deal.

Deciding whether to structure your sale as a merger or acquisition can be overwhelming. We can connect you with the best M&A professionals to help you choose the one that best protects your interests and goals.

Work with top wealth advisors, investment banking representatives, finance accountants, and M&A attorneys. Reach out to us at Exitwise to find the best experts for a successful maximum-value exit.