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What is the Difference between Takeover and Merger?

Dashmeet Kaur

| Updated: Apr 30, 2020 | Category: SEBI Advisory

With the change in time, the corporate world has undergone a whole new level of advancement. It compels all the small and medium enterprises to pace up with the dynamic structure. Those companies that fail to cope with the changes are either dissolved or taken over by large business entities. If you also struggle to sustain in the competitive market, then you must have come across the concept of merger, takeover, and amalgamation. However, often entrepreneurs get confused about choosing from merger and acquisition for the expansion of their business. This write-up provides an exclusive difference between takeover and merger that will help you make the right decision.

An overview of Merger and Takeover

Both merger and takeover are similar corporate pursuits that combine two separate firms into a single legal firm. Companies avail several benefits from mergers and acquisitions, such as economies of scale, increased sales revenue, diversification of services, larger market share, and tax efficiency. There is a substantial difference between takeover and merger in regards to implementation.

In legal terms, “a merger refers to the consolidation of two companies into one company with a management structure and new ownership.” Mostly, the merger takes place voluntarily among two equal scale companies that yield the advantage of reduced operational costs and producing revenue, which is worth more than the total sum of its parts.

On the other hand, in takeover or acquisition, one company purchases a portion or entire shares/assets of another company. It usually involves two companies of different sizes as the larger company takeovers smaller companies. The transaction undertaken in the company takeover can be friendly or hostile in nature. The acquiring company offers a cash price per share to the shareholders of the target firm.

Merger and takeover is a boon for the companies that hustle to drive organic growth.

Categories of Mergers and Takeovers

The difference between takeover and merger is apparent by their categorization; let’s look at various types of mergers and company takeovers individually:

Types of Merger:

  • Horizontal Merger: It is the union of companies that are in direct competition with each other regarding their product lines and markets.
  • Vertical Merger: When two or more companies of the same supply chain merge together, it is known as a vertical merger.
  • Market-extension Merger: It is the union of those business entities who deal in the same product lines or offer the same services, yet operate in different markets.
  • Product-extension Merger: When companies of the same market, sell different but related products combine, it is called product-extension merger.
  • Conglomerate Merger:  This type of merger happens between two unrelated businesses, such as a clothing company and a software company.

Types of Takeovers

  • Reverse Takeover- Reverse takeovers or Bail Out takeover is a type of acquisition that helps the managers of private companies to attain a public company status without resorting to an (IPO) initial public offering.
  • Friendly Takeover- Under this type of takeover, the acquirer company notifies its Board of Directors about the acquisition offer before making a direct offer to the target company. Thereon, the acquired company take the consent of the Directors & shareholders of the target company to have a friendly takeover.
  • Hostile Takeover- A hostile takeover is a forced method of acquiring the target company. In such an acquisition, the management of the target company does not agree for the merger or is reluctant to for takeover. A takeover is referred to as hostile, if the board of the target company rejects the acquisition offer, but the acquirer continues to pursue it.

Key difference between Takeover and Merger

Following is the head to head comparison, which highlights the differences between takeover and merger:

Sr. No Terms of Differences Takeover Merger
1 Number of Entities Involved Minimum 2 companies are required in which one company takes over the shares or assets of the other company. Minimum 2 companies are required for a merger wherein two companies merge together as one.
2 Size of the Companies Different sizes of companies are involved where the larger company takeovers smaller companies. Both companies are equal in size.
3 Transfer of Shares The acquirer company purchases or takeover more than 50% shares of the target company. Shares of the absorbing company are given to the shareholder of the absorbed company.
4 Terms Company takeover can be friendly or hostile. A merger is usually voluntarily or friendly.
5 Consolidation Takeover is driven by the acquirer company with or without the consent of the acquired company. Merger is often driven by the absorbing company.
6 Accounting Treatment The acquirer company takes over all the assets and liabilities of the target company. The assets and liabilities of both the companies are merged and consolidated.

Advantages of Merger and Takeover

Now that you have perceived the difference between takeover and merger, take a sneak peek of their benefits:

  • Increase in business size- Merger or company takeover is an adequate technique to enlarge the business in a short period, which otherwise could take years.
  • Cut short the competition- Merger and acquisition reduce competition as they facilitate companies to reinforce their business by combining strengths with their competitors. The synergies of the resources and less competition help companies to flourish their position in the market.
  • Increased power: when two companies join together to form one single legal entity, they become a dominant player in the market. Thereby, the newly formed entity dominates other players and gains a bigger market share. Also, M&A makes it easier to attract more customers
  • Tax benefits: By taking over a company, the losses of an acquirer company can be written off against the profit of the target company, thus reduces the net taxable income. Also, a foreign establishment with a high corporate tax can utilize its overseas acquired/merger company’s domestic tax payment system to pay a lower amount of tax.
  • Better visibility: When two market players merge; their research team also becomes double in number. This way, companies come up with better and more innovative strategies and increase their market share.

Regulatory Framework that governs the Mergers and Acquisitions

  • Mergers- The strategic arrangement of mergers between the company, shareholders, and creditors is regulated under Sections 390 to 394 of the Companies Act, 1956, and Sections 230 to 234 of the Companies Act, 2013.
  • Acquisitions-  The takeover or acquisition of the company can take place in the following forms as per SEBI regulations:
    • Acquiring existing shares of the target company
    • Subscription to new shares of the target company

Conclusion

Though there is a difference between takeover and merger, however, both are an efficient method to enlarge the business. It depends on your business needs to either merge your entity or acquirer a potential company.

The procedure of merger and acquisition is complex, so one should take the guidance from a legal firm like Swarit Advisors to streamline the process.

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Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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