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Understanding the Basics of Mergers and Acquisitions for Beginners

Posted by Caroline Fallon on Aug 12, 2020 2:14:00 PM


Mergers and Acquisitions 1We’ve all heard the term, “mergers and acquisitions” before, but what are they? Well, in simple terms, they are when two companies join together to maximize a shareholder’s wealth. Sounds simple enough, but what’s the actual difference between the two? Read on to find out more!

What is an Acquisition?

An acquisition is a bit less complicated than a merger is. An acquiring company will purchase a major stake in another business entity and then that company can either retain its original name or change to the acquiring company’s name.

Typically, the company that is doing the acquiring is a much larger company and can be seen as “taking over” the smaller company.

Mergers and Acquisitions 2

The Difference Between Mergers and Acquisitions

So, we now know what an acquisition is but what is a merger and how is it different?

A merger creates a completely new company, one that has never existed before. When both companies merge together, they are usually similarly sized companies and act as equal partners in their venture. This creates one big company for the two of them to become equal partners.

The main difference between the two terms is, merging two companies creates an entirely new company while acquiring a company means one company is taking control over another smaller company.

Why Do Companies go Through Mergers and Acquisitions?

There are a few advantages to merging or acquiring two companies, such as,

  1. Growth
  2. Improved Finances
  3. Increased Supply-Chain Pricing Power
  4. Decreased Competition

Whatever the reason is for acquiring or merging companies, when done correctly and effectively the outcome can be very lucrative for both the companies themselves and the stockholders.

Mergers and Acquisitions 3

The Risks

No matter how prepared and motivated CEOs and the board of directors are, the chance of a problem can always occur when merging or acquiring two companies. There are a few reasons why going through this process can increase risk and in turn create a tough start, including:

  1. The differences in culture
  2. Mass employee layoffs
  3. Miscalculation in the evaluation of assets
  4. Poor communication between new employees

Understanding the risks and complications you may encounter before undertaking an acquisition or merger can help your company become better prepared to tackle them.

Mergers and acquisitions can be a great opportunity for businesses. At Satty, Levine, & Ciacco, CPAs, P.C. we can help you determine the most advantageous tax strategy, manage negotiations, administer the deal process and more!

If you’re looking to go through with or learn more about mergers or acquisitions, contact Satty, Levine, & Ciacco, CPAs, P.C.

Topics: Insider

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