What are Mergers and Acquisitions?

Since “mergers & acquisitions” are so often mentioned in the same breath they may seem interchangeable. However, while both involve two or more companies joining together, a merger and an acquisition are quite different.

Mergers are like marriages in that both companies agree to the union, and both give up a certain amount of control and independence to become a new institution. After a merger, the newly combined entity takes on a new name and issues new stock in that name. Typically, mergers occur between companies of roughly equal size.

Acquisitions, as the name suggests, are an outright purchase of one company by another, usually larger company. Even the language surrounding acquisitions is more aggressive — the company being purchased is referred to as the “target company.” If the acquiring company buys 51% or more of the target company’s stock, it can assume control whether the target company likes or not, in which case the acquisition is called a “hostile takeover.”

After an acquisition, the purchased company usually ceases to exist, and it operates under the name of its new owners. In some cases, the acquiring company allows the purchased company to stand alone and retain its identity. That’s what happened in the case of Facebook’s $1B acquisition of Instagram in 2012. Instagram still does its photo-sharing thing, but now it answers to Facebook.

Real life M&A examples

Companies merge with or acquire other companies for the same reasons people work together or buy tools. Typically, they believe they can do more or do better as a result of teaming up or acquiring additional capacity.

For example, one of the biggest mergers of the past decade was that of H.J. Heinz Co. and The Kraft Foods Group in 2015, forming The Kraft Heinz Company. The deal was put together by investment firms 3G Capital and Berkshire Hathaway, which owned 51% of the shares in the new company. The new entity’s board of directors drew from the leadership of both companies, and the merger offered a lot of advantages to both companies and their shareholders. 

The cost savings alone were an estimated $1.5B per year through economies of scale. Among other benefits, the merger allowed Heinz to refinance debt on the strength of Kraft’s solid credit rating. Meanwhile, Kraft piggybacked on Heinz’s global reach to break out of its concentration on the North American market.

Acquisitions can be a quick way for one business to add the specialized abilities of another. Between its 1998 launch and 2015, Google acquired 184 other companies. Often, it did so with an eye toward buying the expertise or technology needed to help grow the company beyond its original business: online search results. Eight acquisitions were all folded into Google Maps and ranged from the satellite imaging company Keyhole (acquired in 2004) to the restaurant review and guidebook publisher Zagat (in 2011). Now you can find the best Thai restaurant in town and see where it is … from space!

It was somewhat stunning when Facebook acquired Instagram since the then-new photo sharing app had just 13 employees. However, Facebook saw it as a way to remain competitive with Twitter and Google. Likewise, its 2014 acquisition of the mobile messaging company WhatsApp — for $19B in cash and stock — gave Facebook instant cred in the mobile environment.

The Instagram acquisition marked a change in Facebook’s acquisition strategy. Facebook has made 89 acquisitions since its founding in 2004. Prior to Instagram, these acquisitions were a form of aggressive recruiting for talent. Facebook would usually shut down the companies it purchased but kept their innovative founders and employees as Facebook staff.

There is a downside to aggressive acquisitions that rapidly grow a business, however. Do too much of that and people get suspicious. Google, Facebook, and Twitter now face growing criticism as monopolies, with calls for them to be broken up.