What happens when two companies get together? Do they merge? Or does one company acquire the other?
In today’s business world, the terms mergers and acquisitions are in use interchangeably. While they are similar with respect to two companies integrating to run a consolidated business, they are different in terms of why the two join and how they operate after coming together.
What is a merger?
Merger is the process of two existing companies coming together. Two existing companies, usually from the same sector with similar valuations, merge to form a new entity.
The two companies dissolve and give rise to a new entity with new ownership and management.
Mergers are mostly friendly, where both entities voluntarily agree to integrate.
Companies enter into a merger agreement to reap financial and operational benefits such as reduction in costs, entering new markets, expanding labour, and multiplying profits.
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What is an acquisition?
The process of acquisition involves two companies, too. But instead of them coming together, one company takes over the other.
The two companies involved are usually different in their sizes and financial valuations.
The larger company is the acquirer. The smaller company getting acquired gives up the business and all its assets to the larger company. The acquired company ceases operations as the ownership completely moves to the acquirer.
Acquisitions happen for reasons such as the acquiring company wanting to establish a monopoly or to take over the technologies developed by the smaller company. In other cases, acquisitions take place for operational benefits like expansion of labour.
The nature of these agreements is more hostile than friendly.
Benefits and drawbacks of mergers and acquisitions
Though they are two different forms by which companies come together, they have similar benefits and limitations.
Advantages of mergers and acquisitions:
- The primary motivation for these corporate integrations is to achieve economies of scale. They reach economies of scale when production increases, bringing the costs down.
- In both cases, there is a possible increase in market share.
- There is a decrease in risk because it gets diversified. Upon such integrations, the resulting companies may venture into new opportunities and diversify their product line, thereby dividing the risk.
- Developing new technologies or procuring new assets can be an expensive, time and labour-intensive affair. With companies integrating, they get access to each other’s physical and intangible properties.
Disadvantages of mergers and acquisitions:
- The highest impact of mergers and acquisitions is on the employees. These deals may lead to a reduction in the number of employees when both companies have similar teams managing similar roles.
- Employees have to go through a cultural shift when two companies integrate.
Every company follows a different culture and vision. When two companies merge, employees may resist accepting each other’s principles.
When there is an acquisition, the employees of the target company are compelled to adapt to the culture of the acquirer.
Also Read: Turbulence ahead with Tata mega merger
- A merger or acquisition involves combining the debts of both companies. This increases the debt component of the resulting company, making it difficult to raise new loans when required.
Difference between mergers and acquisitions
| Mergers | Acquisitions |
| Merger is the process of two companies joining hands to form a new entity. | Acquisition is the process of one company taking over the business of another company. |
| Merger mostly takes place between companies that are equal in terms of their financial status and goodwill. | Acquisition usually happens when a superior company absorbs a smaller company. |
A new entity forms after the merger. | No new entity gets formed. Sometimes, the target company dissolves. In other cases, the target company and the acquirer become subsidiary and parent companies, respectively. |
| When two listed companies merge, new shares are issued after the merger. | An acquisition does not lead to a new issue of shares. |
Mergers are more friendly, voluntary and mutual in nature. | Acquisitions can be hostile and involuntary. The target company may not have the option to call off the acquisition agreement. |
Both companies getting merged have equal power and authority in the new entity. | The acquirer has complete control of the business, and the target company loses all powers to influence decisions upon getting acquired. |
Merger and acquisition examples in India
The Companies Act of 2013 governs the merger and acquisition deals in India.
While we have numerous examples, let us discuss two famous deals here.
- Reliance Industries and Ed-a-mamma acquisition
Founded by the Bollywood actress in 2020, Ed-a-mamma is a sustainable clothing brand for kids and new mothers.
In July 2023, Reliance Industries announced its plan to acquire Ed-a-mamma’s 51% stakes for ₹ 300-350 crores.
A win-win deal for both parties, this acquisition will be Reliance’s entry into the baby and maternity clothing sector. As far as Ed-a-mamma is concerned, this is an opportunity to introduce new products such as furniture for babies, storybooks, etc.
- HDFC Ltd and HDFC Bank merger
One of the recent mergers is between HDFC Bank and its parent company, HDFC Ltd.
Housing Development Finance Corporation (HDFC) Ltd was earlier a non-banking company lending home loans to its customers.
The two entities announced their merger in July 2023 and will continue to operate under the name of HDFC Bank.
This strategic move, as they claim, is beneficial for both entities.
While HDFC Bank is gaining by increasing its customer base and operations, HDFC Ltd will benefit by giving up on its non-banking status and leveraging the regulations applicable to the banking sector in India.
Also Read: The mega merger of HDFC and HDFC Bank
Bottomline
There are numerous instances of companies merging and acquiring one another.
Corporations get into these arrangements to reap maximum benefits however, not every deal is successful.
The success of such deals depends on varied factors. Some of the common challenges that companies face after mergers or acquisitions are – selecting the wrong target company, cultural shifts and disputes, and very high costs spent to merge/acquire.
