Mergers and Acquisitions

Mergers & acquisitions (M&A) are the processes by which two companies come together. The goals of M&A include increasing market share, improving efficiency, gaining access to new customers, multiple arbitrage, or entering new markets.

Key Concepts

Target Company

the company being acquired (or the company that is not leading the merger). Sometimes this company might be called the “Target” or the “Seller.”

Acquiring Company

the entity that initiates and leads the M&A transaction. Sometimes this company might be called the “Acquirer” or the “Buyer.”


the efficiencies and benefits gained by two companies combining. These include cost savings, increased market share, or improved operational effectiveness.

Market Share

the portion of the total market a company controls with its products or services.

What is the difference between a merger and acquisition?

“Merger” and “acquisition” are often used interchangeably, but they are distinct transactions. In short, mergers involve two or more companies combining to form a new entity, while acquisitions involve an acquiring company purchasing and absorbing a target company. Here’s a overview of the key differences:


Two or more business entities agree to combine their operations, assets, and liabilities into a combined legal entity. The decision is mutual. At least one of the original companies ceases to exist independently. Control and ownership is shared between the merging companies, though the proportion of ownership can vary widely (e.g., 50-50 or 95-5).

Different Types of Mergers:

Horizontal mergers: When companies operating in the same industry merge, aiming to achieve synergies and increase market share.

Vertical mergers: When companies at different stages of the supply chain merge, aiming to streamline operations and enhance efficiency.

Conglomerate mergers: When companies from unrelated industries merge, seeking to minimize risk exposure by diversifying. This approach used to be more popular but now tends to be out of favor, with companies tending to opt for greater focus, allowing shareholders to themselves diversify across their portfolios.


Also known as a takeover, an acquisition occurs when an acquiring company takes control of a target company, by purchasing its assets or shares. This can be a mutual decision or not. Both companies may continue to exist independently. However, the acquiring company gains control and ownership of the target.

Different Types of Acquisitions

Hostile Takeover: when the acquiring company pursues the target company without consent. This can involve direct negotiations with shareholders or other aggressive tactics to gain control.

Leveraged Buyout (LBO): the acquiring company to purchase a target company without committing substantial amounts of their own capital. Instead, they rely on the cash flow of the target company to service the debt.

Asset purchase: the acquiring company gains control by buying specific assets and liabilities of the target company.

Stock purchase: the acquiring company gains ownership by purchasing the target company’s outstanding shares. This can be done with consent or in a hostile takeover.

What is an example of an acquisition?

One prominent example is the acquisition of Pixar Animation Studios by The Walt Disney Company. In 2006, Disney purchased Pixar in a deal worth approximately $7.4 billion (which today would get you a decent, but not industry leading, software company). Pixar, known for its animated films like “Toy Story,” “Finding Nemo,” and “The Incredibles,” brought their creative talent and cutting-edge animation technology to Disney. This allowed Disney to strengthen its market share in animation and enhance its ability to create animated films. Pixar benefited from Disney’s vast distribution network, marketing resources, and established brand presence.

Other M&A Transactions

Spin-off: involves a company divesting a portion of its business by creating a new, independent entity. This allows the parent company to focus on its core operations while providing the spun-off entity with autonomy.

The M&A Process

Due Diligence:

Due diligence involves a comprehensive review of the target company’s financials, operations, and legal standing (among other things). This helps the acquiring company assess potential risks, liabilities, and opportunities associated with the transaction.


Both parties must determine the value of the target company in order to negotiate a fair purchase price. Valuation methods can include;

  • a multiple of earnings (based on analysis of relevant transactions)
  • discounted cash flow (DCF) analysis (considering potential changes to the business post transaction),
  • replacement cost analysis.

New Entity:

In a merger, the merging companies can combine to form a new entity, or one combany can absorb the other. The new (or continuing) company inherits the assets, liabilities, and operations of both merging companies.


The process of two or more separate entities, merging resources, operations and management structures to form a new (or combined) entity is called consolidation. This is the key outcome of a merger.

Why Do Companies Pursue Mergers and Acquisitions?

The main purpose of mergers and acquisitions (M&A) is to enhance the performance and competitiveness of the participating organizations. This is achieved through one or more of the following:

Economies of Scale:

Larger companies, resulting from mergers or acquisition, can realize cost savings through bulk purchasing or shared resources. Lower costs contribute to increased profitability.


Companies can lower their costs by doing the same work with less people. M&A offers opportunities to reduce duplicative costs. This can mean reducing two finance, HR, legal, or procurement teams down to one (or maybe 1.5). The same goes for software licenses and other costs.

Entry into New Markets:

Acquiring a business in a different market, region or country allows the acquiring company to access a new customer base while capitalizing on the specific expertise, established customer relationships, and market knowledge of the acquired company.

Intellectual Property:

Acquiring companies may target businesses with unique patents, trademarks, or proprietary technologies to strengthen their competitive position.

Market Share Expansion:

Acquiring companies may purchase a similar company to gain a larger portion of the market and more influence over their industry. For example, if two fierce competitors merge, they no longer have to compete (antitrust authorities may have something to say about this though).


By merging with a company with a separate product line, customer base, or geographical presence, the purchaser can minimize their risk to market fluctuations by reducing reliance on a specific market or segment. This is less favored nowadays with companies striving to be more focused and shareholders able to achieve diversification across their portfolio by holding different stocks.


Board of Directors

The board of directors must evaluate the strategic and financial implications of an M&A transaction. They should also consider the potential risks associated with a transaction.


Shareholder approval is required for a selling company, and buyers usually require it for major M&A transactions. This ensures their interests are considered in decisions that will significantly impact their investment and the organization’s future. This is a big topic with a lot of law around it, and it differs between jurisdictions.


M&A deals are subject to regulatory scrutiny to ensure fair competition and protect the interests of consumers, vendors, and other relevant stakeholders. Regulatory bodies assess the potential impact on market competition, and sometimes other interests like labor or national interests. Regulators may impose conditions or restrictions to mitigate their negative impact of a M&A deal (e.g., mitigate anticompetitive effects).

Frequently Asked Questions