An increasingly common occurrence in the modern business world, mergers and acquisitions allow different companies to consolidate market share like never before. In fact, some companies are started with the express intent of being acquired down the line by a bigger player in the industry. But before someone can execute a merger or acquisition, it is important to understand what mergers and acquisitions entail.
A merger is a business process by which two separate companies combine to form one joint company. A merger creates new ownership, a new management structure, and does not require funds to be expended.
An acquisition, also known as a hostile takeover, is when one company takes over another. An acquisition dissolves the smaller company in its totality and absorbs all of the assets within.
While both mergers and acquisitions combine what was previously two companies into one, there are some notable differences. A merger is seen as the friendlier of the two options since it dilutes both companies’ power to create a joint entity. On the other hand, an acquisition is a more aggressive process that subsumes a smaller company to gain control of its assets.
A merger can easily cost millions of dollars to execute. This include attorney’s fees on both sides, filing fees, retainers, commissions, and other associated expenses that come with dissolving two entities to create a new joint entity.
An acquisition can vary wildly in cost. In general, an acquisition is executed by acquiring more than 50% of a company’s stock, thus taking majority ownership of the thing. This means that the cost of an acquisition is at minimum the cost of acquiring 51% of a company’s stock. If the company is doing well, this could be millions or even billions of dollars. If the company is doing extremely poorly, this fee could sharply decline.