What is a merger?

Mergers are when two or more businesses decide to merge into one. Regardless of whether the new, larger business carries the name of one of the old businesses or decides to rebrand itself altogether, the new business is an entirely new third entity, legally speaking. Mergers happen between two companies of the same size, not one large company and one smaller company (in which case, the larger company would simply acquire the smaller one).

Internally, even though they are both large undertakings, mergers generally don’t go as smoothly as acquisitions. This is because both companies must learn to work with one another and pool their strengths. Most mergers happen because two businesses complement one another and can provide capabilities, infrastructure, market share, innovation, or any other advantage. Because the companies often operate in the same industry, there can be many positions and entire departments made redundant as a result of the merger. There may also be friction among employees doing the same work but initially from different companies pre-merger, as they likely have different ways of working.

In Canada, a 66% majority of shareholders must approve the merger before it is allowed to proceed to government and regulatory approval. This is where things tend to get difficult as externally, mergers tend to face more scrutiny and obstacles than acquisitions. This is because mergers can lead to reduced competition in key industries, which can drive up prices for consumers without necessarily improving service, convenience, selection, or quality. In Canada, the Competition Bureau is responsible for regulating the Canadian marketplace and ensuring that companies don’t grow too large and monopolize key industries.

Sometimes, if there is a high risk that the merger would unfairly damage competition, merging companies will divest their products or services to competing businesses in order to gain the government or other regulatory bodies’ approval. The formula and process used to figure out what or how much to divest is complicated and highly dependent on the projected size and influence of the “new” company post-merger, as well as the vitality and variety of competition in the industry.

As alluded to earlier, mergers can lead to greater job losses compared to acquisitions (especially when two competing companies in the same industry merge). This is because both companies that decide to merge often have many of the same staff, and the new company does not always need double the headcount for many support and administrative positions. It isn’t uncommon for mergers to feature clauses or financial incentives to specifically offset these job losses and provide redundant or laid-off staff with compensation packages. Mergers not only affect support and administrative staff, however. Executives are also heavily affected by mergers. After all, companies do not keep two CEOs.

Merger example

Two telecommunications companies decide to merge: Company A and Company B. Company A has a large, modern cellular network and millions of customers, but does not offer television or home internet services. Company B does not offer cellular services but does offer television and home internet services with millions of customers.

Companies A and B respectively hold shareholder meetings where the proposed terms of the merger are presented to shareholders, and after receiving 80% approval in both votes, put forth the proposed merger to the Competition Bureau. Because telecommunications is such a vital industry with little competition in many regions in Canada, the government may demand that Company B divest its television offerings before approving the merger. Company B finds a willing buyer for its television service in Company D, and the government approves the transfer of business and subsequently, the merger. The merger goes ahead with Company A and B becoming Company C.

What is an acquisition?

An acquisition occurs when one company decides to purchase and absorb another. Unlike mergers, in which the affected businesses are often competitors, acquisitions typically occur between companies in different industries. Large, successful companies often purchase up-and-coming companies, those providing novel or patented products, services or methods, or companies on the decline and in need of financial support. Acquisitions can be the only way a company is able to deliver a service, sell a good, or obtain intellectual property.

Just like mergers, shareholders must vote on and approve the transaction, but only the shareholders of the “target” company (the one being acquired, not the one doing the acquiring) must vote. Acquisitions are generally structured in a way that allows shareholders of the target company to convert their shares into shares of the new company, sell their shares for higher than market value, or acquire shares of the new company at a reduced rate than market value at the time of acquisition.

The Competition Bureau is as equally involved with acquisitions as it is with mergers, and divestiture is also sometimes required for the acquisition to be approved. This is generally only required for larger acquisitions, and the company acquiring the target company is often the one who needs to divest. 

Acquisitions generally go more smoothly than mergers because there is less redundancy between the companies. Acquisitions typically do not happen between two companies who do the exact same thing and offer the exact same products. Often, the employees from the target company offer something the acquiring company lacks, hence the acquisition.

Acquisition example

A growing, successful advertising agency based in Toronto wants to expand into Quebec and do work for Francophone clients. It decides to acquire an existing, smaller Montreal-based advertising agency rather than enter an unfamiliar market without experience, staff it from scratch, try to build brand recognition, and learn the intricacies of Quebec corporate law.

The Toronto-based agency is quite large and successful, whereas the Montreal-based agency has a smaller headcount and a more modest balance sheet. The Toronto-based agency purchases the Montreal-based agency for $10 million, and it becomes the Toronto-based agency’s “Montreal office”. The employees in Montreal now work for the Toronto agency under its brand name and within its corporate structure, working for their same clients with the same job titles and levels of seniority.

A word of caution

As with any major organizational change, mergers and acquisitions can upend the established order of how your company does business. These changes can go far beyond your employer brand: there is a risk of departments clashing, ways of working being incompatible, IT system integration issues, and an overall loss of corporate culture. If your company has an established way of doing things that changes almost overnight, there will be some turbulence and growing pains post-merger or acquisition. It is important to take time to smooth out these differences so the new, larger company can focus less on internal issues and more on dominating the market.