Are Mergers or Acquisitions More Common & Why?

When companies look to expand their operations, increase revenue, and gain a competitive edge, they often turn to mergers and acquisitions. But what exactly is the difference between a merger and an acquisition? And which strategic move is more common?

Understanding Mergers vs. Acquisitions

Mergers and acquisitions (M&A) are two different types of financial transactions companies may pursue for growth and development. While often used interchangeably, there are important distinctions between mergers and acquisitions:

What is a Merger?

A merger occurs when two separate companies combine together to form a new, joint organization.

• Mergers tend to be voluntary and involve companies that are roughly the same size and scope.
• The purpose is often to reduce operational costs, expand into new markets, boost revenue and profits, and achieve synergies by consolidating resources.
• Mergers are more common when the parties involved have similar size and power. It’s rare that two major corporations merge, as leadership is difficult to consolidate.

What is an Acquisition?

An acquisition refers to one company taking over another to gain control of its assets and operations.

• Acquisitions tend to be more hostile than mergers as there is usually a high imbalance of power between the acquiring company and target company.
• Acquisitions are more common because it’s rare for two companies of equal standing to consent to merge.
• Negotiations center around the purchase price and often require high amounts of cash.
• Companies acquire others to expand product offerings, lower operational costs, eliminate expenses from buying from a supplier, or acquire important assets.

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Are Mergers or Acquisitions More Common?

When examining the prevalence of mergers versus acquisitions, acquisitions are far more common for several key reasons:

Imbalance of Power

Acquisitions are more frequent than mergers because there is often an imbalance of power, resources, and size between companies in a potential M&A deal.

• It’s rare to find two companies of equivalent stature within an industry consenting to merge.
• Larger corporations hold the upper hand in negotiations and therefore tend to acquire smaller players.

Hostile Takeovers

Acquisitions may take the form of hostile takeovers, which are typically one-sided.

• A company may initiate a hostile takeover of a target company without consent from the target’s management or board.
• The intention is to gain controlling interest against the wishes of the target. This is rare in a merger.

Greater Upside

For larger companies, acquisitions present greater potential benefits than mergers.

• Acquiring smaller firms can expand product lines and gain market share quickly.
• Eliminating a competitor also reduces market competition.
• Acquisitions provide access to technology, talent, and operational efficiencies.
• The financial gains from acquiring a smaller entity will likely outweigh those of merging with an equally large organization.

High Valuations

Startups and smaller firms often have high valuations, making them attractive acquisition targets.

• Well-funded startups with innovative technology can demand lofty price tags.
• Large tech companies like Google, Amazon, and Apple regularly acquire startups for billions.
• Acquiring these fast-growing companies can be more advantageous than a merger.

Quick Expansion

Companies often favor acquisitions for the speed, ease, and lower risk they offer compared to mergers.

• Merging two complex organizations can take months or years.
• Acquiring a small company is faster and can achieve the same goals of entering new markets, gaining technology, or expanding the customer base.
• The streamlined process lowers overall risk and uncertainty that comes with lengthy mergers.

Key Differences Between Mergers and Acquisitions

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Why Do Mergers Still Occur?

Despite acquisitions being more common, mergers can offer unique advantages in certain circumstances:

• Consolidating larger companies – Two equivalent corporations may merge to create operations of scale and cut duplicate costs.
• Entering new markets – Merging with a company already established in a desirable market can provide quicker entry.
• Increased negotiating power – Combining two major players can increase leverage with suppliers and distributors.
• Mitigate competitive risk – Preemptively merging to prevent a competitor acquisition can be advantageous.
• Shared vision – Occasionally, leadership teams share a vision that is better pursued jointly through a merger.
• Regulatory concerns – Antitrust regulators may block a large acquisition but approve a merger.

Key Takeaways

• Acquisitions are more common than mergers due to power imbalances between companies, the benefits to large acquirers, high valuations of targets, speed of the process, and hostile takeover approaches.
• Exceptions do occur where mergers offer specific strategic advantages, such as consolidating major corporations or increasing market power.
• While the terms merger and acquisition are often used together, there are key differences in how they are initiated, structured, and who holds leadership roles in the combined entity.
• Acquisitions provide quick growth opportunities for large corporations and lucrative exit strategies for startups and small companies.

So in most cases, acquisitions are more frequent than mergers given their advantages and ability for large corporations to absorb smaller players in expedited processes. However, some scenarios do warrant merger considerations to jointly pursue growth strategies.