Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
Last year, the total volume of M&A reached $5 trillion.
To put this figure in context, the entire global corporate debt pile is $7.7 trillion - and a significant proportion of that figure is derived from M&A. DealRoom works on a daily basis with some of the most active participants in this market.
In this article, we draw on some of our vast experience in the industry to provide readers with an overview of the M&A fundamentals.
Although the terms are often used interchangeably, there is a difference between mergers and acquisitions.
The line that defines that difference tends to become more blurred as the difference between the size of the two companies involved in the transaction diminishes. Hence, the term, ‘a merger of equals.’
In our experience, there is another, although far less discussed, method of differentiating between mergers and acquisitions: valuation.
In an acquisition, the target company tends to request higher valuations, perhaps as target company directors look to maximize their payoff from the deal. The differences are discussed in more detail below.
A merger is a corporate transaction which involves the consensual combination of two companies to create a new legal entity.
The shareholders of the two companies partaking in the merger will each receive some pre-agreed combination of shares in the new entity.
There is typically no buyout of shareholders involved in a merger.
Rather, all shareholders' stock is transferred into the new entity, often in close proportion to the market capitalization of the two companies that existed before the merger.
An acquisition is a corporate transaction which involves the takeover of one company by another. No new legal entity is created and instead, the acquired company is absorbed into the buyer’s existing operations.
That doesn’t necessarily mean that the acquired company disappears, however.
For example, Microsoft acquired Skype and LinkedIn, but both brands still exist. Unlike mergers, acquisitions are not always consensual (‘friendly acquisitions’) and, when management of the target company position themselves against a transaction, it can be considered a ‘hostile takeover’ or ‘hostile acquisition.’
Key Differences Between Mergers and Acquisitions
As mentioned in the first paragraphs, the distinction between mergers and acquisitions is often not a straightforward one to make.
CXOs also have a tendency of referring to transactions that are self-evidently acquisitions as ‘mergers,’ perhaps in an attempt to appease shareholders and bruised egos.
Further differences that distinguish mergers and acquisitions from each other can be seen in the table below.
Mergers and Acquisitions in Practice
Whether your company is considering a merger or acquisition, the steps involved are largely the same: Both cases require the creation of shortlists (although it’s more likely that a company contemplating a merger will have one company in mind), valuations (on on each side of the transaction in the case of a merger), extensive due diligence, deal negotiation, and post transaction integration.
An example of each is outlined in the sections which follow.
Company Merger Example
The biggest merger of all time, that of Exxon and Mobil in 1998 to create ExxonMobil, is also still regarded as one of the most successful.
The merger created what was at the time of the closing of the transaction, the third largest public company in the world and the largest oil company. The deal was so big that the new entity (as noted above, mergers create completely new entities, unlike acquisitions) had to divest 48,000 petrol stations and a refinery to pass its antitrust review.
The best way to think about an acquisition is to look at Alphabet (otherwise known as Google), the most active acquirer of any public company this century.
To date, it has acquired approximately 250 companies, all of which have been absorbed into the business, and its operations.
Some became successful and integrated into various divisions within the company (e.g., a 2020 acquisition of Irish company Pointy eventually became part of maps).
In the course of the acquisitions, many directors at the acquired companies were let go and the companies’ brands often became footnotes in history.
Business owners often overlook mergers, believing that acquisitions are the only way to achieve corporate growth.
In fact, mergers and acquisitions are quite distinct from one another and have differing strategic benefits, depending on what your company is capable of, and what options are available to it.
At DealRoom, we’re highly experienced in both forms of transaction. Talk to us today about how we can help your company in its merger or acquisition.
Last year, the total volume of M&A reached $5 trillion.
To put this figure in context, the entire global corporate debt pile is $7.7 trillion - and a significant proportion of that figure is derived from M&A. DealRoom works on a daily basis with some of the most active participants in this market.
In this article, we draw on some of our vast experience in the industry to provide readers with an overview of the M&A fundamentals.
Although the terms are often used interchangeably, there is a difference between mergers and acquisitions.
The line that defines that difference tends to become more blurred as the difference between the size of the two companies involved in the transaction diminishes. Hence, the term, ‘a merger of equals.’
In our experience, there is another, although far less discussed, method of differentiating between mergers and acquisitions: valuation.
In an acquisition, the target company tends to request higher valuations, perhaps as target company directors look to maximize their payoff from the deal. The differences are discussed in more detail below.
A merger is a corporate transaction which involves the consensual combination of two companies to create a new legal entity.
The shareholders of the two companies partaking in the merger will each receive some pre-agreed combination of shares in the new entity.
There is typically no buyout of shareholders involved in a merger.
Rather, all shareholders' stock is transferred into the new entity, often in close proportion to the market capitalization of the two companies that existed before the merger.
An acquisition is a corporate transaction which involves the takeover of one company by another. No new legal entity is created and instead, the acquired company is absorbed into the buyer’s existing operations.
That doesn’t necessarily mean that the acquired company disappears, however.
For example, Microsoft acquired Skype and LinkedIn, but both brands still exist. Unlike mergers, acquisitions are not always consensual (‘friendly acquisitions’) and, when management of the target company position themselves against a transaction, it can be considered a ‘hostile takeover’ or ‘hostile acquisition.’
Key Differences Between Mergers and Acquisitions
As mentioned in the first paragraphs, the distinction between mergers and acquisitions is often not a straightforward one to make.
CXOs also have a tendency of referring to transactions that are self-evidently acquisitions as ‘mergers,’ perhaps in an attempt to appease shareholders and bruised egos.
Further differences that distinguish mergers and acquisitions from each other can be seen in the table below.
Mergers and Acquisitions in Practice
Whether your company is considering a merger or acquisition, the steps involved are largely the same: Both cases require the creation of shortlists (although it’s more likely that a company contemplating a merger will have one company in mind), valuations (on on each side of the transaction in the case of a merger), extensive due diligence, deal negotiation, and post transaction integration.
An example of each is outlined in the sections which follow.
Company Merger Example
The biggest merger of all time, that of Exxon and Mobil in 1998 to create ExxonMobil, is also still regarded as one of the most successful.
The merger created what was at the time of the closing of the transaction, the third largest public company in the world and the largest oil company. The deal was so big that the new entity (as noted above, mergers create completely new entities, unlike acquisitions) had to divest 48,000 petrol stations and a refinery to pass its antitrust review.
The best way to think about an acquisition is to look at Alphabet (otherwise known as Google), the most active acquirer of any public company this century.
To date, it has acquired approximately 250 companies, all of which have been absorbed into the business, and its operations.
Some became successful and integrated into various divisions within the company (e.g., a 2020 acquisition of Irish company Pointy eventually became part of maps).
In the course of the acquisitions, many directors at the acquired companies were let go and the companies’ brands often became footnotes in history.
Business owners often overlook mergers, believing that acquisitions are the only way to achieve corporate growth.
In fact, mergers and acquisitions are quite distinct from one another and have differing strategic benefits, depending on what your company is capable of, and what options are available to it.
At DealRoom, we’re highly experienced in both forms of transaction. Talk to us today about how we can help your company in its merger or acquisition.
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