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Mergers and Acquisitions are prominent terms in the world of finance and investing. They both refer to financial transactions where companies buy, sell or invest in other companies. These usually include two companies combining for various reasons.
Through mergers and acquisitions, companies can increase their value or size, enter new markets, expand geographically, improve their profitability, and much more. Both of them are similar in some aspects. However, there are some differences between them too.
What are Mergers?
Mergers represent agreements to combine two separate companies into a new entity. In this agreement, two existing companies agree to combine their resources and operations and bring them under the same roof. In mergers, two companies of similar sizes and value combine. Usually, they are more friendly and happen with the agreement of both companies.
What are Acquisitions?
Acquisitions represent a financial transaction where one company takes over another. Usually, this happens when one company acquires the shares or assets of another company. The company that purchases these shares and assets absorbs the other company. Therefore, the acquired company cannot operate independently anymore. Acquisitions are more hostile and usually do not include the agreement of both companies.
What are the differences between Mergers and Acquisitions?
Usually, investors may use the terms mergers and acquisitions interchangeably. However, there are several differences between both. The primary difference between both of these is their nature. As mentioned, mergers are more friendly. However, acquisitions are more hostile and also termed hostile takeover sometimes.
In a merger, both companies involved are of similar sizes. These combine to become equal partners in a new organization. However, with acquisitions, both companies may not be of similar size. The acquiring company may be of larger size while the acquired company may be smaller. Similarly, both companies do not become equals. Instead, one company controls or may dissolve the other.
Both mergers and acquisitions also send different market signals. Investors may see mergers as a positive outcome and expect better results for the newly formed company. Similarly, investors may perceive acquisitions as a negative outcome for the acquired company. For the acquiring company, the market signal may be positive and show its dominance in the industry or market.
What are the advantages of Mergers and Acquisitions?
Mergers and acquisitions can have various advantages. Firstly, they result in synergies and can bring improved economies of scale. These can also increase profitability by increasing revenues or reducing costs. Similarly, they allow companies to capture a higher market share. With M&A, companies can also increase their distribution channels and expand geographically.
What are the disadvantages of Mergers and Acquisitions?
Mergers and acquisitions also have some disadvantages. Usually, these require companies to bear large expenses to consolidate operations or takeover others. The costs also include high legal and filing expenses. Sometimes, mergers and acquisitions can also send negative market signals, resulting in a decrease in a company’s share prices. Some key staff may also leave companies in case of mergers and acquisitions.
Conclusion
Mergers and acquisitions are financial transactions that include the combination of two companies. Mergers occur through the agreement of both involved companies. Acquisitions are more hostile and happen due to one company’s dominance. Both of these have some advantages and disadvantages, as mentioned above.
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