What are Mergers and Acquisitions?
Mergers and acquisitions (or M&A for short — the M&A world is rife with acronyms and initialisms) is a bit of a catchall phrase. For all intents and purposes, M&A simply means the buying and selling of companies. When you think about it, mergers and acquisitions aren’t different; they’re simply variations on the same theme.
In the strictest sense, a merger is a combination of two or more entities where each merging entity has an equal stake in the new enterprise and each merging entity has a very clearly defined role in the new entity. This ideal is the vaunted merger of equals.
Daimler’s 1998 combination with Chrysler was a merger of equals. In a more practical sense, so-called mergers of equals are rare; one side usually ends up controlling the enterprise. For example, the years following the Daimler-Chrysler merger showed that Daimler executives planned all along to control the combined entity.
Although actual mergers do occur, most of the activity in the M&A world centers on one company buying another company, or the acquisitions category. Using the word merger keeps the uninitiated on their toes; plus, talking about combining two companies as equal partners rather than about committing a hostile takeover sounds much more egalitarian.
Mergers are far less common than acquisitions. An acquisition is when one company buys another company, a division of another company, or a product line or certain assets from another company. Actually, an acquisition is when any kind of business purchases another part (or all) of another business.
Although some companies grow organically (from within by creating and selling products or services), an acquisition allows a company to bypass the growth stage by simply buying existing sales and profits.
Starting up a new product line may be less expensive than buying an existing one, but the market may take a while to adapt to the new product, if it does at all. For this reason, buying other companies rather than relying on organic growth may make sense for a particular company.
The fact that one can transfer a company’s ownership through a sale often comes as a bit of surprise to many people (including many business owners, believe it or not). Business owners, especially owners of middle market and lower middle market companies, have spent their careers building a company, so the process of selling a business is often something new and foreign to them.
Business with revenues between $250 million and $1 billion are considered middle market. Those between $20 million and $250 million are lower middle market.