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Capital raising or mergers and acquisitions are terms used mostly in reference to the banks and financial organizations. Though the end-users, that is, the customers may be least interested to know about their bank’s capital raising processes or status in terms of merger and acquisition, it is very necessary for them to keep themselves updated about these aspects of the bank, since this will help them figure out how solidly then can bank upon that financial organization.
Mergers and acquisitions have always contributed largely to the capital raising of the concerned organizations. The interesting fact is that, though ‘mergers and acquisitions’ refers to a single term, there is a distinction between ‘mergers’ and ‘acquisitions’. Before we discuss mergers and acquisitions are distinct, let’s have a quick overview of the term ‘capital raising’.
What is Capital Raising?
‘Capital raising’ refers to the devices or processes that help an organization in increasing capital and meet long term needs of the organization. Some of the best practiced ways of capital raising are private equity transaction, targeting organizations for seed raising. Sometimes, management processes also play a vital role in the development as well as expansion of the capital. It is necessary to mention in this regard that mergers and acquisitions have been found to be a preferred way for the providers of capital raising services. This is why it is often ironically stated that the alchemy of mergers and acquisitions is the effort to make three by adding one with one.
Distinction between Mergers and Acquisition
Acquisitions: ‘Mergers’ and ‘acquisitions’ are most commonly used to imply the same meaning. However, the terms have slightly different meanings. When a company or an organization is taken over by another, most possibly by a bigger one, the purchase is termed as ‘acquisition’ to look at it from the legal perspective, the acquired company, that is, the target company ceases to exist after the acquisition since the acquirer or the buyer company ‘swallows’ the other one. It is the stick of the buyer that continues to be in the trade. Evidently, the two finance companies involved in acquisition are of two different sizes, while the larger one swallows the smaller one.
Mergers: Mergers involve two different organizations of almost the same sizes. Both the firms agree to merge with each other to form a single organization and carry on business. The new company that emerges is separately owned and operated by both the parties involved. ‘Mergers of equals’ is the term most appropriately used to refer to this practice in the world of finance.
However, the irony is that true ‘mergers of equals’ do not happen in practice. It is often of deteriorating value and dignity for an organization to be acquired by a larger one. That is why most organizations prefer to go for the deal of ‘merger’ while it is actually an instance of acquisition in practice. Thus the smaller organization keeps its dignity intact, carrying no negative connotation.
Though mergers and acquisitions carry different implications as two different terms, both are beneficial for both the involved parties. Both the companies realize that they can function better and earn higher profit or escape a tough circumstance only if they work together. And, it is always important if the merger or acquisition is friendly or hostile.
Jacob Willis is a finance advisor who takes interest in various capital raising services. His keen interest in how most ‘acquisitions’ turn out to be ‘mergers’ in practice is expressed through his articles on mergers and acquisitions.
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