This article highlights the difference between the two types of corporate restructuring; merger and acquisitions, which are the most known of corporate restructuring and demerger, which is also another type of corporate restructuring.
Corporate restructuring is the process of making changes in the composition of a firm’s one or more business portfolios in order to have a more profitable enterprise. Simply, it is reorganizing the structure of the organization to fetch more profits from its operations or is best suited to the present situation.
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 create a new, joint organization. The new entity is relatively bigger in size. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.
Forms of Merger
- Merger through Absorption: When two or more entities are combined into an existing company, it is known as merger through absorption. In this type of merger, only one entity survives after the merger, while the rest of all cease to exist as they lose their identity.
- Merger through Consolidation: When two or more companies fuse to give birth to a new company, it is known as merger through consolidation. This implies that all the companies to the merger are dissolved, which means they lose their identity and a new company is created.
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: The merger is said to be horizontal when the companies that are combined operate in the same industry or deal in similar lines of business. The market share of the newly formed company is greater than the individual entities. It is aimed at reducing competition, increasing market share, economies of scale and research and development.
- Vertical Merger: Vertical merger takes place 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 upstream or downstream, i.e. where the business takes over its suppliers, then it is an upstream merger while if the company extends to its distribution entities, the merger is termed downstream.
- Conglomerate Merger: A type of business integration, in which the merging companies are not related to each other, i.e. neither horizontally nor vertically. In a conglomerate merger, two or more companies operating in different business lines combine under one flagship company. This is further divided into, managerial conglomerate, financial conglomerate and concentric conglomerate.
- Co-generic Merger: Co-generic merger is 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: A 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 is the business strategy whereby a company transfers one or more of its business undertakings to another company. In other words, when a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, it is called a demerger.
A demerged company is said to be one whose undertakings are transferred to the other company, and the company to which the undertakings are transferred is called 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 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.