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25 Jan Mergers and Acquisitions: Each Require Unique Consideration

What structure makes sense for your particular deal, a merger or acquisition? It’s important to understand both the obvious—and not so obvious—differences between these two business strategies long before you begin considering potential deals.

Valuation

One such difference to consider is the impact of business valuation. While the valuation procedure may be the same, valuation plays a different role depending on whether you are pursuing a merger or an acquisition. If you sit down at the negotiating table for a merger, you and the other party will need to come to agreement as to how each company’s relative value will equate into ownership share in the new entity. With an acquisition, you will have a similar discussion about valuation, but it will be in terms of how the valuation of the company to be acquired contributes to the new enterprise and what that means in terms of purchase price.

Terms and Taxes

Another significant difference between merger and acquisition comes down to the actual terms. In most cases, the party acting as seller will want to structure the acquisition for cash up front, while the party acting as buyer is likely to prefer to make payment over time. Typically, this is due to differing tax objectives. The seller is looking for a capital gain while the buyer wants a deal that gives him or her a near-term write-off or a deduction of cost. Both parties need to sort through these tax issues and understand how performance will change once the deal goes through.

Company Culture

Probably one of the most overlooked factors in determining whether to pursue a merger or acquisition comes down to differences in company culture. For example, your company may be very focused on maximizing work output or hours billed or some other measurement of productivity. The other company may have a completely different culture where the focus is on ensuring every employee also “has a life” and the incentives and feedback for employees within the two organizations may be completely different.

In these types of situations, combining the two organizations via a merger could lead to disaster or at least, unnecessary challenges to the success of the new entity. The alternative is to agree to an acquisition that puts one management team in charge and requires employees from the other organization to make the adjustment, a difficult decision but likely one with better chance at success than a merger.

Unique Advantages

Either strategy can resolve succession questions and improve your retirement picture. Each also typically brings their own unique set of benefits.

Acquisitions as a business strategy may allow you to:

  • Establish a base within a new market or expand your existing one.
  • Expand your geographical reach.
  • Develop a new market niche by bringing in new business of a specific type.
  • Increase productivity and profitability by increasing output with unchanged fixed costs, resulting in higher profits.
  • Drive up business prestige and company value.

Mergers, on the other hand, may bring some of the above as well as a few other advantages:

  • Reduced work level.
  • Shared responsibility among other competent managers.
  • Greater security through a larger organization
  • Improved competitiveness with large players.

Understanding the many differences between merging and acquiring are critical to successful valuing, negotiating and structuring a business deal.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.