When Should a Company Choose a Merger Over an Acquisition?
Choosing between a merger (a partnership where both companies collaborate and stay independent) and an acquisition (where one company takes over another) is a big decision. While companies can’t control outside factors like market changes or competition, they need to think about these carefully before deciding.
Here’s when a merger is often the better option:
✅ 1. Uncertainty in the Market
If there’s a lot of uncertainty—like not knowing whether a new product will work or whether customers will accept it—it’s smarter to start with a merger:
- Mergers require less money and commitment than acquisitions.
- If things go well, the company can invest more or even buy out the partner later.
- If things go poorly, losses are much smaller than a failed acquisition.
Examples:
- Bristol-Myers Squibb invested in ImClone through an equity merger rather than buying it outright. When the drug had problems, the loss was smaller.
- Pfizer started with a contractual merger with Warner-Lambert for Lipitor before eventually acquiring the company once the drug proved successful.
Quick Guide:
- High uncertainty = Nonequity merger
- Medium/Low uncertainty = Equity merger
✅ 2. Level of Competition
In competitive markets, companies may rush to acquire a partner before a rival does. But if uncertainty is also high, an immediate acquisition can backfire.
Instead, it’s smarter to:
- Form a merger with an option to acquire later once things are clearer.
Quick Guide:
- Low competition = Nonequity merger
- Medium competition = Equity merger
✅ 3. Type of Synergy (How the Companies Will Work Together)
-
Modular Synergies: Companies operate separately but combine outcomes (e.g., hotel and airline loyalty programs).
🔹 Best with nonequity mergers -
Sequential Synergies: One company finishes a task, then passes it on (e.g., biotech firm developing drugs, big pharma handles approval).
🔹 Best with equity mergers -
Reciprocal Synergies: Companies work closely and share knowledge in real-time (e.g., Exxon and Mobil merging to optimize all operations).
🔹 Best with acquisitions, not mergers
✅ 4. Type of Resources Being Shared
-
Soft resources like people, brand, or know-how are sensitive.
Acquisitions can make employees feel frustrated or leave the company.
🔹 Better to use equity mergers to keep people motivated and aligned. -
Hard resources like machines or distribution networks are easier to integrate.
🔹 In such cases, acquisitions can work well.
✅ 5. Amount of Overlap or Redundancy
- If companies have very similar operations, a full acquisition helps to cut duplicate costs.
- If overlap is low or moderate, a merger is better because there’s no need for full control.
Quick Guide:
- Low redundancy = Nonequity merger
- Medium redundancy = Equity merger
✅ 6. Company Capabilities
Just because a company is good at either mergers or acquisitions doesn’t mean it should always choose that route. Smart companies build skills for both and use them strategically based on the situation.
