Back to M&A Resources | M&A Advisory

Which is Right for You? The Difference Between Mergers and Acquisitions

Which is Right for You? The Difference Between Mergers and Acquisitions

A lot of startup owners go into business with the intention of selling their companies when the time is right. What they may not have thought about is whether it makes more sense to sell via a merger or an acquisition.


At NorthStar Venture Partners, we work on mergers and acquisitions every day. If you are considering selling your company, you may be wondering:

What’s the difference between merger and acquisition?

We’re here to help. As the saying goes, there’s more than one way to skin a cat. Here are some things you should know about the key differences between mergers and acquisitions and the various types of mergers and acquisitions.

What is a Merger?

Let’s start with mergers. A merger is a transaction where two entities combine to form a new entity. Mergers may be undertaken to combine resources, increase market share, or access new technology.

An example of a very successful merger is the merger between Disney and Pixar. Prior to the merger, Pixar released movies only once every couple of years. Thanks to the merger, they can now release two films a year, bringing in more revenue for both companies.

What is an Acquisition?

An acquisition is a transaction where one company buys another. In most cases, a company that is acquired will be brought under the umbrella of the buyer, but that’s not always the case.

An example of a successful acquisition is Google’s acquisition of Android in 2005. With the purchase of Android, Google got access to mobile technology that allowed them to compete with Apple’s iPhone and mobile devices designed for use with Windows.

Acquisitions are usually sales that are carried out with the agreement of both parties. However, it is possible for one company to acquire another in a hostile takeover. An example of a hostile takeover happened in 2010 when French pharmaceutical company Sanofi-Aventis made an offer to buy Genzyme. When Genzyme refused the offer, Sanofi went to board members individually and persuaded them to vote in favor of the acquisition. 

What Are the Key Differences Between Merger and Acquisition?

Now, let’s review some of the key differences between mergers and acquisitions. There is a lot of overlap between the two terms and they are sometimes used interchangeably, but there are some key ways in which they diverge.

  1. In a merger, cash may not be exchanged because the two companies involved have chosen to join forces to form a new, third entity. There may be behind-the-scenes changes such as management restructuring or reissuing stock under the new entity’s name, but a merger is not a purchase.
  2. In an acquisition, the acquiring company pays to buy the company being acquired. In most acquisitions, the company being bought is put under the umbrella of the acquiring company.
  3. As mentioned above, acquisitions may be friendly or hostile. Mergers are always friendly because the entities in question agree to come together for the benefit of both.
  4. A merger usually brings together two companies that are equal or close to equal. By contrast, an acquisition usually involves one company that is larger and more financially secure acquiring a smaller company.
  5. Mergers require the formation of a new entity. The two merging companies must agree on a name and corporate structure. In most acquisitions, the company acquired usually absorbs the company they buy and all operations are done in the name of the acquiring company. (There are some exceptions to this rule.)
  6. Acquisitions may not include up-front negotiations. One way to undertake a hostile takeover is to acquire more than 50% of a company’s stock. In that case, the only negotiation would be with individual stockholders.
  7. Finally, in a merger, new stock shares must be issued in the name of the new entity. In an acquisition, there is no need to issue new stock since the company will still operate under its existing name. However, there may be shares that are awarded to owners or board members of the company being acquired.

As you can see, there are some key differences between merger and acquisition. 

Types of Mergers and Acquisitions

There are multiple types of mergers and acquisitions. With acquisitions, the two options are a friendly acquisition and a hostile acquisition, both of which we have already discussed. Mergers may be done in several ways:

  • A congeneric merger is one where two companies join forces to share overlapping factors, including products, technologies, or distribution.
  • A conglomerate merger is one where the two companies merging do not have overlapping business concerns.
  • A market extension merger involves two companies joining together to gain access to new market sectors.
  • A horizontal merger is when two companies that make similar products combine.
  • A vertical merger is when two companies at different stages in a manufacturing or supply chain join forces. 

The type of merger you choose will depend on what your goals are.

Conclusion

If you’re looking to grow or sell your company, you may need assistance deciding whether an acquisition or a merger is right for you -- or which type of merger will be most advantageous. 

NorthStar Venture Partners is here to help. Book a call with us today!

Julien Meyer

Written by Julien Meyer

NorthStar Venture Partners is led by Julien Meyer, MBA. A veteran of the tech community, Meyer is a 3x startup founder with 2 exits, a published author, a Harvard Business School Leading with Finance Alum and a Top Rated Startup Consultant (UpWork, 2018). Meyer advised on over 50 successful transactions before starting NorthStar. His experience has helped him understand the unique challenges that founders experience when trying to exit their ventures.