The Different Types of Mergers and Acquisitions

Summary: A look at what separates a merger from an acquisition.

A merger is when two companies come together to form one company, and an acquisition is when one company takes over another company – of course, this is a simplified explanation and there are different types of mergers and acquisitions. Let’s look at this in further detail.

Types of Mergers and Acquisitions Mergers

Typically, although there are likely exceptions, a merger occurs when two distinct companies come together to form a totally new entity. Another way to consider this is, when two separate companies come together to form a new company, the stock of the two individual companies ceases being traded, and new stocks are issued for the newly formed company. Keep in mind that this does not address different types of mergers or acquisitions, this is purely a basic concept. Let’s look at a hypothetical example:

CamCam and LightLit merge into one company and rename it CamLit. CamCam is known for manufacturing cameras and film. LightLit is known for producing solar panels. The companies have developed solar power cameras that can be utilized for personal use, and scaled up for commercial use. Through market research, valuations and a lot of due diligence, they have determined that CamLit and its products are far more valuable than CamCam’s or LightLit’s are by themselves. This merger has also opened them up to a new market, and despite their new solar camera product, they are still producing their original products too. They are simply selling them under their new company name.

This is the most typical type of merger you will come across; however, true mergers of this nature are far less common than acquisitions.

Acquisitions

In the acquisition process, one company pulls another company under its corporate umbrella by buying the majority share in the business. The acquired company still exists as its own entity, but it is now run and controlled by another business or corporation. Acquisitions can be friendly or hostile, depending on whether the target company wants to be bought out or not.

For publicly traded companies, a hostile takeover can occur without an agreement in place, because all that needs to happen is for the acquiring company to get its hands on the majority of shares in the target business. This can be done by privately by secretively contacting board members and convincing them to sell their shares, or by buying up all available stock on the market, and then targeting board members.

There more types of mergers and acquisitions than what we are discussing here, but here are some real-world examples of acquisitions:

Google bought out Android in 2005. Android still operates as its own business, but it is now controlled by Google. Google has the right to control how Android markets, rolls out products, what tech it releases or doesn’t, etc.

Burger King bought out Tim Horton’s. Canada’s favourite coffee chain is now owned and operated by Burger King, an American Company. Tim Horton’s still retains its name and many of its classic offerings, but Burger King took the liberty of changing Tim Horton’s coffee supplier, reviewed their menu to cut out the less cost-effective items, and now holds the power to determine what new products make it to the menu. Any recent visitors to the chain will notice that Tim Horton’s no longer offers the fan-favourite, Apple Cider, and for a while the parent company was considering getting rid of TimBits!

We’ve Just Scratched the Surface…

Within these frameworks there are more specific types of mergers and acquisitions, which provide more specifics as to the aim of the procedure. Some deals are done to increase market share, open up new industries or expand product line offerings. Some deals are friendly or hostile. If you want to learn more, experts from consulting firms in Toronto are there to help.

Hi! I'm Stevie, and I'm interested in everything that surrounds the topic of personal finance. I hope my articles will be of some use to my readers!