Mergers vs. Acquisitions: What is the Difference?

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. 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. 

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. 

Understanding Mergers

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.

Understanding Acquisitions

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.

“Integrations are really different. You don’t know what you don’t know. You need capabilities that you’re unlikely to have in your organization.”

Steve Kaufman, former CEO and chairman of Arrow Electronics

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.

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Key Trends in Mergers & Acquisitions for 2024

As we embrace 2024, dynamic economic trends in the United States will continue to shape the mergers and acquisitions landscape. The influence of fluctuating interest rates is pivotal, serving as both a catalyst and a checkpoint for M&A activities. We believe the coming year will be characterized by a trend of cautious buyer behavior, reflecting a more nuanced and strategic approach toward investments, especially in technology, healthcare, AI, and other rapidly evolving sectors. In parallel, there is pent-up demand for deals, spurred by substantial capital reserves waiting on the sidelines. 

As we embrace 2024, dynamic economic trends in the United States will continue to shape the mergers and acquisitions landscape. The influence of fluctuating interest rates is pivotal, serving as both a catalyst and a checkpoint for M&A activities. We believe the coming year will be characterized by a trend of cautious buyer behavior, reflecting a more nuanced and strategic approach toward investments, especially in technology, healthcare, AI, and other rapidly evolving sectors. In parallel, there is pent-up demand for deals, spurred by substantial capital reserves waiting on the sidelines. 

Against the backdrop of increased regulatory scrutiny and a U.S. Presidential election, all of these factors collectively paint a complex 2024 M&A picture — where opportunities are abundant yet intricately tied to the broader economic pulse. Our exploration delves into these top projections to help guide small and mid-sized companies through the complexities of this evolving market. Here are the key trends in mergers and acquisitions for 2024.

Optimistic Economic Outlook Fuels M&A Activity

A key driver of M&A activity is the overarching economic environment, which includes factors like Gross Domestic Product (GDP) growth, inflation rates, and fiscal policies. Next year, we anticipate stronger M&A activity than in 2023, bolstered by the continued strong economic growth that has been a hallmark of the Biden-Harris economic agenda

GDP growth is a crucial component, as it often signals overall economic health and business confidence, which are essential for robust M&A activity. According to the most recent U.S. Bureau of Economic Analysis (BEA) release, GDP “increased at an annual rate of 5.2 percent in the third quarter of 2023” — the fastest pace of expansion we’ve seen since the end of 2021. Furthermore, “profits increased 3.3 percent at a quarterly rate in the third quarter.”

When GDP rises, companies tend to have better financial performances and more optimistic outlooks, making them more willing to engage in acquisitions or seek mergers. Interest rates and inflation, however, also significantly factor into the outlook equation. 

  • High interest rates increase the cost of borrowing; expensive financing can lead to fewer leveraged buyouts and make acquisitions less attractive or feasible, especially for companies with limited cash reserves. 
  • Similarly, while moderate inflation can indicate a growing economy, high inflation may lead to increased borrowing costs, which can impact the affordability of financing M&A transactions. 
  • Higher interest rates also depress valuation multiples, leading to higher discount rates and, therefore, lower valuations, which could influence buyers and sellers in lower middle market M&A. Conservative investment strategies and reduced risk-taking are also byproducts of higher interest rates. 

However, the tide is turning. In December 2023, the Federal Reserve kept its key interest rate unchanged and forecasted three cuts in 2024. Furthermore, the Biden administration’s policies to manage inflation — consumers anticipate a 3.1% annual increase in prices over the next year, marking the lowest expected rate since March 2021 — while fostering economic growth could create a balanced environment conducive to M&A. Tax incentives and government spending in certain sectors, technology or green energy, for example, may also spur acquisitions as companies seek to capitalize on these trends.

“52% of U.S. CEOs plan M&A over the next 12 months, considerably higher than our global survey, which finds only 35% planning deals. In addition, 58% of CEOs plan to divest an asset in that period as leaders seek to fund capital spending in multiple areas.”

EY CEO Survey October 2023

Exercising Caution Amidst Demand, Buyers Opt for Smaller Deals

In the evolving M&A landscape, we expect buyers to exercise greater discernment in deal-making decisions. With a heightened focus on value and viability, only the most compelling sellers will likely capture significant interest. This selective approach is part of a broader shift to mitigate risks in an increasingly cautious market. As a result, we anticipate more strategically structured deals, which include:

An emphasis on earn-outs, a contractual provision that ties a portion of the purchase price to the future performance of the acquired business, will help bridge valuation gaps between buyers and sellers. For buyers, earn-outs reduce upfront cash requirements and mitigate risk. Sellers benefit from earn-outs as they offer the potential for a higher sale price, especially if they are confident in the business’s future performance. It also demonstrates the buyer’s commitment to the business’s continued success.

Discounted Purchase Prices
We also expect a rise in discounted purchase prices for all-cash deals, which provide immediate liquidity benefits to sellers while presenting a cost-effective approach for buyers. Sellers may accept a lower total purchase price in exchange for the certainty and immediacy of cash — particularly appealing in uncertain, rapidly changing markets. For buyers, offering a cash deal at a discounted price can be advantageous as it eliminates the need for complex financing arrangements and can expedite the deal process. It also avoids the uncertainties of future valuations or earn-out arrangements.

In both scenarios, the key is to strike a balance that aligns with buyers’ and sellers’ strategic objectives and risk appetites. Earn-outs and cash deals with discounted prices offer flexibility and can be tailored to suit the unique circumstances of each transaction.

Will this cautious approach be put to the test? With significant capital accumulating due to investments largely unutilized in 2023, buyers are ready for the right opportunity. As a result, a notable shift in M&A strategy is emerging in the context of the prevailing high-interest-rate environment. There is an increasing focus on smaller-scale deals, marking a strategic pivot in response to the financial landscape. Buyers, influenced by the higher cost of borrowing, are gravitating towards more modestly sized transactions. This reflects a balancing act between leveraging available capital and navigating the challenges of the current interest rate scenario.

As a mergers and acquisitions consulting firm focused on small to mid-sized companies, we adapt our strategies and solutions to our clients’ evolving needs, effectively providing the agility necessary to navigate changing circumstances.

“It’s easier to have a buy versus build, plug-and-play type transaction in the middle market than it is in very large deals. Middle-market deals can be less exposed to leverage and can represent more of a strategic priority fit for many buyers in the market. As a result, we’re seeing more of these deals get done.”

 —  Christopher Keefe, chair of Nixon Peabody’s business & finance department

Increasing Regulatory Scrutiny May Hinder Large M&A Activity 

Next year, regulatory scrutiny, especially concerning anti-competition and national security issues, is expected to intensify, presenting a significant obstacle for large-scale M&A deals. This heightened regulatory environment also steers companies to pursue numerous smaller, more varied industry-specific M&A transactions. Such an approach not only navigates around the complexities of stringent regulations but also offers a competitive edge in the current market landscape for various reasons. 

  • In a challenging regulatory environment, betting heavily on a single large deal can be risky if regulatory approval is uncertain or if the deal faces significant delays or modifications. By spreading investments across different sectors and deal sizes, companies can mitigate the risk associated with regulatory challenges.
  • In industries related to technology, defense, or infrastructure, large deals can raise national security concerns, leading to intense scrutiny and potential rejection. 
  • In a rapidly evolving economic landscape, agility is key. Engaging in smaller transactions enables companies to pivot more easily and integrate acquisitions faster, compared to the complex and time-consuming process often involved in large transactions.
  • In a previous “big is better” era, a broad, all-encompassing approach ruled. Today, smaller, industry-specific acquisitions allow companies to target specific growth areas or capabilities. They can selectively acquire businesses that offer unique technologies, products, or market positions that align closely with their strategic objectives.

“Sharper regulatory scrutiny, which can have a chilling effect on large M&A transactions, can also create a competitive opportunity for enterprises best positioned to complete a higher volume of smaller deals.”

—  Chris Ganly, VP Team Manager at Gartner

Proven Process, Unlimited Potential 

Next year is poised to outpace 2023 M&A activity, driven by strong economic fundamentals fostered by the current administration’s economic policies. This environment encourages existing companies to expand through M&As and makes it attractive for new players to enter the market through strategic acquisitions.

At Freeman Logan, our expertise guides small to mid-sized companies through their most pivotal transformational endeavors. Whether it involves navigating the complexities of an ownership exit, orchestrating a strategic acquisition, or steering a major organizational overhaul, our mergers & acquisitions advisory team is adept at leading the charge.

We offer a comprehensive suite of mergers and acquisitions consulting services tailored to the unique needs of middle-market companies, entrepreneurs, private equity firms, and women-owned and minority-owned businesses. Our offerings span the full spectrum of M&A activities, encompassing everything from identifying potential targets or partners and marketing to providing thorough valuation, due diligence, and negotiation support. We aim to ensure your journey through the M&A process is seamless, strategic, and successful.

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