Combining Businesses - Mergers Vs Acquisitions

Mergers and acquisitions serve to combine two previously separate companies. A merger implies some equality in size or stature as wells as mutual consent between the combining firms, while an acquisition implies one dominant company purchasing a company of lesser size or stature and sometimes even against the wishes of the target (in the case of a hostile takeover).

WHY DO COMPANIES COMBINE?
Besides a public company's general quest for continued revenue growth, companies combine for a variety of reasons, the most prevalent include:

* Synergies - a combined entity may be thought to create revenue enhancements and cost reduction opportunities. Merging companies often cite cross-selling and marketing opportunities as revenue enhancers and the elimination of duplicate overhead costs as potential cost reduction synergies. Management may rationalize the combination of companies on these benefits alone.

* Economies of scale - companies may benefit from greater size and market share in a particular market. Larger economies of scale often make the firms a stronger competitor in the market place.

* Diversification - companies concerned about the risk of concentration within a particular market may argue that the company could benefit through an acquisition of another company in a separate, although perhaps related, market.

* Taxes - tax advantages often play an important part in acquisitions. For example, a profitable acquirer may benefit from a tax loss carry-forward associated with the acquired company. While tax benefits often do not drive a merger, they may play a vital role in supporting the benefits of a potential merger.

Merger vs. Acquisition

While we read a lot about corporate mergers, in reality, true mergers are rare. For political reasons, acquisitions are often called mergers. This is done to ease the integration of the combined entities by phonetically placing them on more equal footing. To make this case, consider a few key elements present in most mergers:

* Prior to a combination of firms, it is agreed that money will flow from Company A to Company B and stock (or assets) will flow from Company B to Company A. When money goes one way and goods go the other way, conceptually, this sounds more like a purchase (acquisition) than a combination (merger).

* After a combination, Company A's name is more prominent and Company A's CEO remains in charge and sets the future strategic vision of the combined entity. This also sounds like one company is more dominant than the other.

* After some time, the merged company's name (Company B) often gets dropped all together.

Hence, in a merger, one company is typically "more equal" than the other. In reality, most mergers are therefore truly acquisitions.

Andy_Ray_Jones

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