HomeProductsAccountingMerger | Types and The Differences with Acquisitions

Merger | Types and The Differences with Acquisitions

Some time ago, the business world in the technology sector was shocked by the official news of the merger of company startup transportation online with the e-commerce largest company in Indonesia, namely Gojek and Tokopedia, in May 2021 and gave birth to a new company called GoTo.

Did you know that most of these businesses merge to help the national economy and solve community problems?

Merger or merger activity is also crucial; a company typically uses this activity cause it can generate profits, develop business, and increase business competitiveness. See this article for more information on the definition and explanation of mergers.

Also read: How to Calculate Customer Retention Rate?

Definition of Meger

What exactly is a merger? The merger is business jargon that you may hear frequently and which may occur in your company.

In a nutshell, a merger is joining two or more businesses to form a new entity. This has both advantages and disadvantages for employers as well as employees who are part of the company.

The merger is only valid if the companies have agreed to join the new business. In most cases, the two companies merge through a transfer of ownership via the stock exchange or cash payment. In theory, both companies sell their stock and issue new stock as new companies.

Also read: Equity Is: It’s Important for Companies to Know

Eight Differences Between Mergers and Acquisitions

Many people still believe that mergers and acquisitions are synonymous. But they are not the same thing. It is critical to understand their differences to understand and be prepared if your company undergoes a merger or acquisition. If you’re still unsure about the distinction between a merger and an acquisition, keep reading to find out.

1. Definition 

These two things are already distinct based on their definitions. According to Investopedia, a merger occurs when two companies join forces to form a new business while retaining one leading company.

While an acquisition is the act of another company taking over a company to purchase shares.

2. Existence of the company

In addition, as part of the merger activity, the two companies will merge to form a new company. During the acquisition, neither the acquirer nor the company being acquired will cease to exist. The acquired company, on the other hand, will become the acquirer’s property.

3. Company’s name

When two or more businesses merge, a new name is created. However, as explained in the previous point, this does not occur in the acquisition because the two companies can continue to operate independently. As a result, the acquired company keeps the same name but works in the acquirer’s industry.

5. Operations

Mergers can occur between two companies of the same size, even if they are in different categories. Acquisitions are more likely, however, when a larger company buys more than half of the shares of a smaller company.

5. Legality

Merger activities are more complicated than acquisitions because they involve more legal formalities. However, because fewer legal documents are involved in an acquisition than in a merger, the process is usually faster. In contrast to acquisition activities, which are more manageable but still necessitate a significant amount of funds and assets for a company to undertake.

6. Objectives 

The objectives of the two activities are also distinct. Businesses typically do the merger activity to reduce operating costs, expand market coverage, and increase profits. On the other hand, unions can help two small, medium, or large companies.

In contrast to acquisitions, this activity is typically carried out by a company to purchase a supplier company to reduce production costs per unit and increase production capacity.

7. Authority

When two companies merge, the companies that result are treated on an equal footing. In an acquisition, however, the more powerful acquiring company has more control over the acquired business.

8. The management

In terms of ownership and management structure, the merged company usually does not undergo significant changes. Meanwhile, as the acquiring company takes over management and ownership, many changes will occur.

Also read: Distribution | Definition, Types, Stages, and Examples

Purposes of Merger

To obtain synergies

Shareholders will undoubtedly benefit from the merger of two companies. A company, for example, can generally achieve synergy through consolidation because it will add value to the new company formed as a result of the union.

Synergy is a significant benefit that the merged company will receive when they can collaborate. Revenue synergies and cost synergies are the two types of synergies. Revenue synergies boost the company’s revenue due to market expansion, product diversification, R&D activities, and other factors.

Diversification 

Mergers are a common way for a company to diversify. To reduce the possibility of losses in the company’s business, a company can diversify its business activities by entering new markets and offering new products or services, including risk management.

Increase assets and funding

In the case of incorporation, the total tax liability of the consolidated company is less than the tax liability of the company when it was established independently.

Tax reasons 

Companies that generate a lot of taxable income can be combined with companies that compensate for any tax losses.

In the case of incorporation, the consolidated company’s total tax liability is less than its tax liability when it was established independently.

Also read: Market Share | Overview and Development Strategy

Types of Merger

Can be carried out in various ways depending on the form and category of a company. Among the different types of mergers are:

Horizontal merger 

A merger that takes place between companies in the same industry. This type is a business consolidation between companies operating in the same industry, often as competitors offering the same product or service. Horizontal mergers are common in industries with fewer firms because competition is higher. The synergies and potential gains in market share for merging firms are much more significant in such an industry.

Vertical merger 

This type is a merger of several companies with different areas of responsibility.

For instance, only. One company serves as a supplier to another. At the same time, other companies handle the manufacturing process or other tasks. This standardization enables businesses to assist one another in their areas of expertise.

Market expansion merger 

When your company merges with another company that offers the same product or service but operates in different markets, this is referred to as a market expansion merger. The primary goal is to provide the merging companies with access to a larger market. Furthermore, the union will provide a more extensive give customer base for market expansion.

Also read: Company Organizational Structure: Key Success Factor

Product expansion merger

This typically occurs when a company does business with a product in the same category and operates in the same market. This type of merger allows your company to group products and have better access.

An example of this type is the acquisition of Mobilink Telecom Inc. from Broadcom. Broadcom will manufacture chips, hardware and systems for personal area networks Bluetooth for wireless LANs. Mobilink Telecom Inc. manufactures mobile phone product designs incorporating a Global technology System for Cellular Communication. The product objective of Mobilink Telecom Inc. will complement Broadcom’s wireless products.

Conglomerate

A merger of companies engaged in completely unrelated business activities. Conglomerate mergers are classified into two types: pure and mixed. Pure conglomerate mergers involve firms that have nothing in common, whereas diverse conglomerate mergers involve firms seeking product or market extensions.

For example, a leading athletic shoe manufacturer merges with a soft drink company. After the merger, the resulting company faces the same competition in its two markets as the individual firms did before the merger. The union of the Walt Disney Company and the American Broadcasting Company is an example of a conglomerate merger.

Benefits and Disadvantages of Merger Activities

Those of you who are thinking about participating in the activity should weigh the advantages and disadvantages. The benefits of the merger include, among other things, increasing the company’s efficiency and ability to generate profits, developing business, and increasing the company’s competitiveness or becoming more competitive.

Furthermore, the disadvantage of this merging activity is that it is difficult to divide tasks and responsibilities. Not to mention dealing with investors and shareholders simultaneously, especially when one of the companies is in a bad financial situation.

Related article: Acquisition: Get to Know its Type

Conclusion

This merger action could be a solution to help your business grow positively. But, before you apply to your company, think about your company’s financial health and the financial health of the company you want to join with you. You can check and learn more about this by reviewing your company’s and your business’s financial statements.

Get a full-fledged Accounting System with robust features from HashMicro to manage your finance, such as cash flow management, journal entries, and reconciliation. Our Accounting Software is also Peppol network-ready for seamless invoicing management. Try now!

Interest in getting savvy tips for improving your business efficiency?

Olivia Mariane Gunawan
Looking forward to give the readers more new insights and useful informations everyday! For business inquiries: [email protected]

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Looking for software system to improve your business efficiency?

Get a free consultation with our business expert by filling in this form!

Rachel-Panjaitan

Rachel Panjaitan
Typically replies within an hour

Rachel Panjaitan
Looking for a Free Demo?

Contact us via WhatsApp and let us know the software you are looking for.

Claim up to 80% Productivity Solution Grant for various HashMicro Software!
1:40
+6587776207
×
Book a Demo by WhatsApp