This article highlights the difference between the two types of corporate restructuring; merger and acquisitions, with demerger, which is also another type of restructuring.
Corporate restructuring involves changing the composition of a company's business portfolios to enhance profitability or adapt to current market conditions. This article delves into the intricacies of mergers, acquisitions, and demergers, outlining their differences and various forms.
Mergers vs. Acquisitions
Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them.
A merger occurs when two separate entities combine forces to form a new, larger organization, while, an acquisition refers to the takeover of one entity by another. Both strategies aim to expand market share or create shareholder value.
Forms of Merger
- Merger through Absorption: One company absorbs another, with the absorbed company ceasing to exist.
- Merger through Consolidation:n: Two companies merge to form a new entity, and both original companies lose their identity.
The common feature of the two forms of the merger is that the resulting or surviving company acquires the ownership of other entities and unites their operations, with its own.
Types of Merger
- Horizontal Merger: when the companies that are combined operate in the same industry or deal in similar lines of business. It is aimed at reducing competition, increasing market share, economies of scale and research and development.
- Vertical Merger: when companies are having a ‘buyer-seller relationship’, join to create a new company. It is an integration of two companies that are working in the same industry, though at a different stage of production and distribution. It can be either upstream or downstream: if the business acquires its suppliers, it's considered an upstream merger, while if the company expands by acquiring its distribution channels, it's known as a downstream merger.
- Conglomerate Merger: when the merging companies are not related to each other, i.e. neither horizontally nor vertically, however, they merge to diversify their business lines. This is further divided into, managerial conglomerate, financial conglomerate and concentric conglomerate.
- Co-generic Merger: when the companies undergoing merger operate in the same or related industry. However, their product lines are different, as in they do not offer the same products but related one. The acquired and target companies share similar distribution channels.
- Reverse Merger: wherein a publicly listed company is taken over by a privately held company and provides an opportunity to the private company to go public, without going through the complex and lengthy process of getting listed on the stock exchange. In this type of amalgamation, the unlisted company acquires majority shares in the listed company.
Demerger
A demerger is a business strategy where a company transfers one or more of its operations to another entity. This process involves splitting the company's activities into separate components, either to form a new, independently operating company, or to sell or dissolve the separated unit.
The company that undergoes the demerger is known as the demerged company, while the entity receiving the operations is referred to as the resulting company.
Types of Demerger:
- Spin-off: It is the divestiture strategy wherein the company’s division or undertaking is separated as an independent company. Once the undertakings are spun-off, both the parent company and the resulting company act as separate corporate entities.
Generally, the spin-off strategy is adopted when the company wants to dispose of the non-core assets or feels that the potential of the business unit can be well explored when operating under the independent management structure and possibly attracting more outside investments. - Split-up: A business strategy wherein a company splits-up into one or more independent companies, such that the parent company ceases to exist. Once the company is split into separate entities, the shares of the parent company are exchanged for the shares in the new company and are distributed in the same proportion as held in the original company, depending on the situation.
The company may go for a split-up if the government mandates it, in order to limit the monopoly practices. Also, if the company has several business lines and the management is not able to control all at the same time, may separate it to focus on the core business activity.
In summary: Mergers and acquisitions involve combining companies or one company taking over another to expand or gain market share, whereas a demerger involves splitting a company into separate entities, often to focus on core operations or create independent businesses.
In case you would like to read the complete version of this article, you can find a comprehensive version of it in North Data's blog, which was written by one of our finance specialists.