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What happens when two companies get together? Do they merge? Or does one company acquire the other?
Mergers and acquisitions, often used interchangeably, refer to the integration of two firms. While similar in creating a unified business, they differ in their reasons for integration and post-merger operations.
The article seeks to provide a thorough understanding of the concepts by examining what is merger and acquisition as well as the distinctions between merger vs acquisition.
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.
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.
In acquisitions, the larger company takes over the smaller one, which ceases operations as all assets and ownership transfer to the acquirer.
Acquisitions occur for various reasons, including the desire to monopolize, acquire new technologies, or expand labour. The nature of these agreements is more hostile than friendly.
Let’s explore the advantages and disadvantages of mergers and acquisitions next.
Advantages of mergers and acquisitions
- Corporate integrations primarily aim to achieve economies of scale, reducing costs as production increases.
- In both cases, there is a possible increase in market share.
- Integrations reduce risk through diversification, as the merged companies can explore new opportunities and broaden their product range.
- Integration allows companies to access each other’s assets, saving costs and effort in developing new technologies or acquiring assets.
Disadvantages of mergers and acquisitions
- Mergers and acquisitions greatly impact employees, potentially reducing staff numbers when companies have overlapping 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.
- Mergers or acquisitions combine both companies’ debts, increasing the resulting company’s debt and potentially hindering new loan acquisition.
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 forms in mergers. The target company may dissolve or become a subsidiary to the acquirer. |
| 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 involuntary and hostile, leaving the target company unable to cancel the agreement. |
| Both companies getting merged have equal power and authority in the new entity. | Post-acquisition, the acquirer controls the business, and the target company loses decision-making power. |
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.
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.
FAQs
The three main types of mergers are:
Horizontal Mergers: These occur between companies in direct competition, aiming to increase market share.
Vertical Mergers: These involve companies along the same supply chain, aiming for higher quality control and better information flow.
Market-Extension Mergers: These happen between companies selling similar products in different markets, aiming to access a larger market.
An acquisition is when one company buys a majority stake or all assets of another company. It can be friendly or hostile. A takeover, however, typically refers to a hostile acquisition, where the acquiring company forcefully gains control of the target company against its will. The key distinction lies in the level of consent and cooperation between the parties involved.
Assessment and Preliminary Review: Initial evaluation of the potential merger.
Negotiation and Letter of Intent: Formalizing interest and outlining terms.
Due Diligence: Detailed examination of the target company.
Negotiations and Closing: Finalizing the deal terms and completing the transaction.
Post-Closure Integration/Implementation: Combining the companies and implementing the new business strategy.
The Accounting Standard 14 (AS 14) pertains to accounting for amalgamations. It applies when two companies amalgamate and provide guidelines for the accounting treatment in the books of the transferee company. AS 14 addresses the accounting of any resultant goodwill or reserves. It is principally directed at companies, but some requirements also apply to other enterprises.
A merger is the combination of two or more companies into a single entity, often with one surviving company. An amalgamation, however, is the blending of two or more companies into a completely new entity. Both processes consolidate companies, but in an amalgamation, the original companies cease to exist, forming a new legal identity.