True mergers are very rare. In most mergers, one company usually ends up having greater control or influence over the other one in the combined entity. A true merger results in two companies joining under one corporate name, without change of management, and sharing control. Acquisitions are more common because they result in one company gaining control over the other. There are two main types of mergers and acquisitions: strategic and financial. They are done by specific types of acquirers for different reasons.
Strategic acquirers are seeking a solution to a business problem through the acquisition of another company, either as a subsidiary or to be absorbed into the acquiring company. Increasing market share by acquiring a competitor is one strategic reason. Others include adding a new product line or service capability, adding expertise, facilities or other assets such as a successful sales staff, or intellectual property such as patents and trademarks.
A strategic acquirer may even be interested in acquiring the name and brand of the target company through a reverse merger. A reverse merger is when a private company acquires a public company so that it can avoid the process involved in launching an initial public offering (IPO) .A strategic acquisition often is done with an exchange of stock if the acquiring company is much larger or trading on the public markets. Strategic merger between two private companies would be more likely a cash buyout of the previous owner.
Financial acquirers are private equity firms or other financially oriented investors. They seek companies that have large cash positions, extensive assets or particularly attractive prospects. Their goals involve investment returns, rather than solving a business need or growing their company. Berkshire Hathaway, a holding company owned by Warren Buffett, is an example of a financial acquirer. Carl Icahn, known for his leveraged buyouts, restructurings and spinoffs of acquired companies, is also an example of a financial acquirer.
Financial acquirers generally acquire their targets through leveraged buyouts. This is when they use the cash and assets of the target to finance a bid to buy a controlling interest in the stock through a tender offer to shareholders. These are how hostile takeovers are cponducted. However, such a process can also be used in a friendly buyout of the owners of the target company. Financial acquisitions often involve extensive reorganization of the target, resulting in the sale or spinoff of divisions and subsidiaries. Proceeds from asset sales and the eventual public offering, in which the acquirer divests interests in the target, provide the investment return the financial acquirer seeks.
- International Journal of Automotive Technology and Management. "Structuring and restructuring Fiat-Chrysler: can two weak carmakers jointly survive in the new automotive arena?" Accessed July 12, 2020.
- General Electric. "A Shared Vision: GE and Alstom Continue Their Common History With Latest Acquisition." Accessed July 12, 2020.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.