Mergers vs Acquisitions: Why Companies Prefer Acquisitions

Understanding Mergers and Acquisitions

Mergers and acquisitions (MA) are both popular strategies for companies seeking growth. However, they differ in nature and prevalence. Generally, acquisitions are more common than mergers. In this article, we will delve into why acquisitions are the preferred method for many companies.

Definitions

Mergers: A merger occurs when two companies join to form a new entity, often with the aim of creating synergy and an equal partnership.

Acquisitions: An acquisition is when one company buys another, which may continue to operate independently or be absorbed into the acquiring company.

Acquisitions: The Common Choice

Acquisitions are more frequent than mergers for several reasons, as discussed below.

Control

Acquisitions allow acquiring firms to maintain control over the target company, which is often a crucial goal. This control enables quicker decision-making and integration processes, making acquisitions a preferred method over mergers.

Flexibility

Companies may find acquisitions easier than mergers because mergers require extensive negotiations and alignment on goals and cultures. Acquisitions offer more flexibility and can be completed more quickly.

Speed

Acquisitions can often be completed more swiftly than mergers due to the rigorous requirements and regulatory approvals that accompany most mergers.

Market Strategy

Acquisitions are often pursued to enter new markets, gain new technologies, or acquire talent, making them a more straightforward option for achieving specific strategic objectives. This aligns well with the strategic growth goals of many companies.

Valuation Advantages

From a financial perspective, acquisitions may be viewed as more favorable. Acquirers can buy undervalued assets or expand their market share without the complexities of a full merger. This is particularly true in scenarios where a target company is undervalued relative to its intrinsic worth.

Why Acquisitions Seem Less Frequent but Are More Common

Notably, acquisitions may not be as frequently reported or discussed in the business press or media as mergers. Mergers are more common because nearly every acquisition is presented to the business press as a “merger.”

This distinction often only changes when the acquired company is disproportionately smaller than the acquiring firm. In these cases, investor relations teams typically have to come clean: “We bought a company.” Otherwise, the merger label is maintained, despite it not accurately representing the situation to those who understand the dynamics and intentions at play.

Conclusion

While both mergers and acquisitions serve strategic purposes, acquisitions are generally more prevalent due to their straightforward nature, control implications, and alignment with corporate growth strategies. Acquisitions offer a flexible and efficient path to growth and are particularly favored by many large corporations.

Conclusion

Acquisitions are more common than mergers due to their straightforward nature, control implications, and strategic alignment. Many large companies, including Microsoft, frequently engage in acquisitions for growth. While mergers are more commonly reported, acquisitions align better with the goal of integrating without the extensive coordination required for mergers. Both strategies serve their purposes, but acquisitions are often the favored method for many companies.