Understanding acquisitions or mergers

Although they are not mandatory in every business, you may at one point require them to expand your business. Mergers and acquisitions (MA) are corporate finance terms mostly used interchangeably although they are slightly different. You may also hear them referred to as consolidations. What exactly are they?

A merger refers to a situation where two separately owned and operated companies come together and agree to operate as one new company. Merging majorly involves companies of relative equal size. The situation however is rare compared to acquisitions.

Acquisitions on the other had refers to the buying of an already established company and being in control of it. It is refers to taking over or buying out a company. The process may be hostile or friendly depending on the situation.

At one point in your business

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operations, you may want or be required to expand your business. One may opt to expand the company by acquiring more space or opening more company branches. In this process of expansion, these are terms you are likely to look out at.

In a simple explanation, mergers or acquisitions are aspects of finance that involves selling, buying and merging companies with an aim of expanding your current business. You may be buying larger companies and selling your small businesses to create a big and profitable company. They are the best option when you are thinking of expanding your business operations.
The aim of the two processes is to enable a quick growth of a company rather than starting on a new company branch. Mergers and acquisition has often been practiced by banks. It is very often that we hear a bank has changed its name. One bank may decide to buy another bank to expand its operations and target a larger market.

This activity however has its advantages and disadvantages. Some of the advantages are;

  • It enables the creation of a larger market and more profit
  • It also saves a company in financial turmoil when bought out

Mergers or acquisitions may also be a disadvantage to the company targeting to expand its operations especially if the activity is done in a hostile manner. The company or the individuals buying out another company may lose their positive reputation if they receive resistance or dispute from the targeted company or the public.

Mergers and acquisition is a complicated activity. It is advisable that a company should hire a professional expert to negotiate and come up with an agreement with the other companies involved.