The term “mergers and acquisitions” is often referred to as a single, unified area of business activity — as a result, the nuances between the two aren’t always clear.
A merger is a strategic partnership where two companies voluntarily unite to form a new entity. Both parties pool resources and operate as shared owners, aiming for mutual growth and benefits. In contrast, an acquisition involves one company absorbing another, typically signifying a shift in control and strategic direction.
Here, we will explore the key differences between mergers and acquisitions and how they offer our clients two distinct strategies for corporate growth and success.
A merger occurs when two companies, often of similar size and scope, come together to form an entirely new entity. This collaborative effort is driven by a mutual decision, where both companies dissolve their individual identities to create a unified organization with shared goals and strategies. Several primary elements characterize the merger process:
- Creation of a New Entity: Unlike other types of business collaborations, a merger results in the formation of a new company. This new entity typically adopts a new name, management structure, and operational approach, representing a blend of the strengths and cultures of the merging companies.
- Shared Ownership and Management: In a merger, the ownership and control are equally distributed among the shareholders of the original companies. This distribution reflects the merger’s collaborative nature, where both companies have an equal stake in the new entity.
- Strategic Motivations: Mergers are often motivated by the desire to expand market share, enter new markets, achieve economies of scale, and enhance overall competitiveness. By merging, companies can combine their resources, technologies, and market presence, creating a more robust and competitive entity.
In contrast, an acquisition involves one company (the acquirer) taking over another (the target). This process does not result in the formation of a new entity. Instead, the target company becomes a part of the acquirer; the target company often maintains its operational presence but under new ownership and control. Critical aspects of acquisitions include:
- Transfer of Control: The most distinguishing feature of an acquisition is the transfer of control from the target company to the acquirer. This transfer can be a friendly, mutually agreed upon takeover or a hostile one, where the target company resists the acquisition.
- Financial Transactions: Acquisitions often involve significant financial transactions, where the acquiring company purchases the target company for a determined price. This transaction can be made through cash, stock exchange, or a combination of both.
- Strategic Objectives: The primary objective of an acquisition is to strengthen the acquiring company’s position by expanding its capabilities, market reach, or resources. Acquisitions can be a quick way for companies to grow, diversify their product lines, or eliminate competition.
The Role of M&A Advisors in Successful Transactions
Navigating a merger, particularly one of near equals, requires meticulous planning and execution to realize its full potential. A trusted M&A advisory firm like Freeman Logan is crucial to navigating this complex process successfully. From performing due diligence — including quality of earnings and valuation recommendations — to developing transition and communication plans, our firm ensures that our clients achieve their strategic and financial goals.
Here is an overview of the typical merger process (for relative equals) and the mergers and acquisitions advisory firm’s role at each stage.
- Mapping Strategic Goals and Objectives
Both companies must be clear on their strategic goals and objectives in this early stage, including identifying complementary strengths and potential benefits of a possible merger.
- Finding the Right Partner and Performing Due Diligence
When identifying a company that complements or enhances the other’s strengths, an experienced M&A advisor can accelerate the process. At Freeman Logan, the breadth and depth of our professional network, combined with superior data mining, enables us to recommend and vet qualified candidates. Our team assesses both companies’ financial health, assets, liabilities, and potential risks — vital to understanding how the merger can synergistically benefit our clients.
- Negotiating Terms
After due diligence, companies negotiate the specifics of the merger, including the new ownership structure, valuation, and merger agreement terms. Determining the value of each company and negotiating terms is a nuanced process. Advisory firms like Freeman Logan assist in these negotiations, ensuring a fair and equitable valuation that reflects the contributions and future potential of each company.
- Securing Regulatory Approval
Regulatory approval is critical to ensure legal compliance if the merger’s size or market impact is significant.
- Developing an Integration Plan
A detailed company integration plan is necessary to align corporate cultures and operational processes. M&A advisors help create a roadmap addressing the logistical and operational challenges of merging two entities into one cohesive organization.
- Communication and Execution
Clear communication is crucial to keep all stakeholders informed. Following this, the companies execute the integration plan, adjusting as needed for a successful transition. Advisory firms assist in developing and implementing communication strategies to highlight the benefits of the merger and address any concerns to maintain stakeholder confidence.
Successfully Completing an Acquisition
Though similar to mergers in some steps, acquisitions differ significantly in their focus and execution. In this process, an acquiring company takes over a target company, leading to a notable shift in control and strategic direction. Again, the expertise of a merger and acquisition consulting company is invaluable in guiding this process effectively.
- Understanding Strategic Goals and Objectives
Both buyers and sellers have financial and strategic goals and objectives they wish to achieve via a successful acquisition. Business owners ready to sell need a comprehensive exit strategy but may need help with execution. With over three decades of experience in the M&A space, Freeman Logan understands that selling a business is one of the most stressful yet rewarding financial events in an owner’s life. We focus solely on lower-middle market companies, taking the time to understand our client’s unique goals and objectives to find the right buyer. Acquirers need a clear strategic purpose for the acquisition: to gain market share, access new markets, acquire new technologies, or reduce competition. Consulting firms assist in clarifying and solidifying these objectives.
- Profiling Prospects
Similar to mergers, it is time to identify potential buyers and sellers at this stage of the acquisition process. As a key advisor, Freeman Logan develops sophisticated marketing that tells our clients’ stories, attracting a vast pool of qualified buyers and securing a higher valuation.
- Negotiating Terms
Acquisitions involve complex legal and financial arrangements, including negotiating the purchase price, structuring the deal (cash, stock, or a mix), and minimizing performance requirements tied to compensation. Working with an M&A advisory with proven quantitative acumen and negotiation skills can help ensure a financially beneficial outcome.
- Determining the Integration Strategy
Similar to mergers, M&A consultants devise an integration strategy to help align business processes and integrate teams. These plans ensure the smooth transition of the target company with minimal disruption and help manage the substantial changes that often accompany acquisitions.
- Communication Planning
M&A advisors develop a communication plan to address the concerns of stakeholders, including employees, customers, and investors. This plan involves conveying the vision and benefits of the acquisition to all parties involved.
Post-Deal: Ensuring Success Beyond the Transaction
In both mergers and acquisitions, the transition and integration phase is critical. According to McKinsey & Company, “most leaders bring limited integration experience…boosting their integration leadership readiness is a critical success factor for pre-close integration planning, a flawless day one, and maximum value capture and integration in the first few years post-close.”
Navigating Complexities of Integration
At this stage, merger integration consultants can be indispensable. Not only does their expertise help ensure a smooth and efficient blending of companies, but the consultants can also mentor company leaders for potential future integration challenges. Fusing two corporate cultures in mergers and acquisitions requires a deep understanding of both entities to create a cohesive new organization. Integration consultants focus on assimilating the target company into the acquirer’s structure, aligning business strategies, integrating employee teams, and consolidating technologies and processes.
Strategic Planning and Execution
Consultants assist in developing a strategic integration plan that addresses both short-term and long-term goals. They ensure that the combined entity or the newly structured company post-acquisition operates effectively and capitalizes on the synergies identified.
Change Management and Communication
Effective change management is crucial in mergers and acquisitions. Consultants help craft and implement communication strategies to address the concerns of stakeholders, mitigate resistance, and foster a positive outlook toward the new changes. They play a crucial role in ensuring that employees from both companies understand the vision and objectives of the merged or acquired entity, promoting a smooth transition and minimizing disruption to operations.
Furthermore, merger integration consultants do more than just facilitate the technical aspects of a merger or acquisition — they also:
- Address the human element, focusing on maintaining morale, productivity, and retention during periods of change.
- Help establish governance structures and leadership roles in the new or restructured organization.
- Provide continuous monitoring and support to manage risks and capitalize on opportunities as the new entity evolves.
While some firms have dedicated merger integration consultants, Freeman Logan includes integration planning in our comprehensive suite of M&A services. Doing so allows us to deliver a cohesive and informed service throughout the entire merger or acquisition process.
Your Long-Term Success is Our Top Priority
Both mergers and acquisitions are pathways to growth and competitive advantage but necessitate different approaches, planning, and execution strategies. Your path forward should be based on your company’s strategic goals, market position, and long-term vision for sustainable growth — all areas where Freeman Logan can provide expert advice and support. Mergers and acquisitions, when executed with precision and foresight, become strategic moves that can redefine your business’s future. Let’s get started today.