In merger two or more companies combine to form a new company. While the selling or amalgamating companies dissolve or go out of existence, a new company is created in the form of the amalgamated corporation.
In acquisition the buying company takes over the selling company. While the buying or acquiring company continues to retain its identity, the selling company ceases to exist.
The buying company can take over the selling company by purchasing its stocks or shares.
In successful mergers and acquisitions the post M&A value of the combined corporation is even greater than the aggregate value of the joining companies before the event when they were separate.
The benefits of merger in the same product or business line include greater economies of scale, larger market share by buying out competitors and penetration into new territories. M&A along the same product or business line is horizontal integration.
M&A may also result in combining complementary resources. For instance a manufacturing company may also take over marketing outlets or buy raw material ores or mines. Such M&A for gaining complementary resources is vertical integration.
Other gains that may result from M&A are synergy benefits, elimination of inefficiencies, making up for weaknesses, increased career advancement opportunities for managers and so on.
Smaller companies sell out to or merge into larger corporations in order to harness their untapped value for the benefit of shareholders. Such deals set free the unrealized value of small companies to their shareholders, who find a profitable exit route by selling of their stock of shares. This is also called ‘harvesting’ the small business. Moreover, sale or merger of a small company may also involve estate planning exercise or considerations.
