Mergers and acquisitions are one of those chief corporate strategies that are often used by entrepreneurs to achieve the key objective of profitable growth of business. Mergers and acquisitions seldom fail to grab the headlines not only because millions, and at times billions of dollars are involved in such deals, but also because apart from the CEOs and managers, a lot of other people like investors and employees are severely affected by such transactions.

The terms merger and acquisition are often uttered in the same breath, but they have slightly different meanings. When two equal-sized companies mutually agree to join hands and a form a new more competitive and cost-efficient company, then the process is called merger. Mergers can be usefully distinguished into three types:

1. Horizontal Merger- Such a merger takes place when two or more corporate firms dealing in similar lines of activity combine together.
2. Vertical Merger- Such a merger occurs when a company merges with companies ‘upstream’ from it and/or companies ‘downstream’ from it.
3. Conglomerate Merger- In marked contrast, conglomerate merger is a combination in which a firm established in one industry combines with a firm from an unrelated industry. Diversification of risk constitutes the rationale for such mergers.

Another type of merger is reverse merger where the shareholders of a private company sell all their shares in the private company to a public company. The public company, then issues a large number of shares, which are acquired by the former shareholders of the private company. The public company is finally merged with the private company. In this way, the private company ends up controlling the public company.

Acquisition on the other hand implies takeover of controlling interest in a company by another company. Acquisition doesn’t lead to the dissolution of the company whose shares have been acquired. It simply means a change of controlling interest in a company through the acquisition of its shares by another group. Acquisitions can be segregated into three forms viz.

1. Negotiated or Friendly Acquisition- In this case, the takeover is organized by the incumbent management with a view to part with the control of management to another group through negotiation. The groups mutually settle the terms and conditions of this type of acquisition.
2. Open Market or Hostile Acquisition- Also referred to as raid on the company, in this type of acquisition, a company acquires shares of the target company from the open market at a price higher than the prevailing market price. Such takeovers are hostile to the existing management.
3. Bailout When a profit making company takes over a financially sick company to bail it out, then this form of acquisition is called bailout. 

Irrespective of categories, all mergers and acquisitions have the following common advantages:

1. Economies of Scale- The operating cost advantage in terms of economies of scale is considered to be the primary motive for mergers and acquisitions. They result in lower average cost of production and sales due to higher level of operation. For instance, overhead costs can be substantially reduced on account of sharing central services such as accounting and finance, office, executive and top level management, legal, sales promotion and advertisement, and so on.
2. Synergy- It results from complementary activities. For instance, one firm may have a substantial amount of financial resources, while the other has profitable investment opportunities. Likewise, one firm may have a strong research and development team whereas the other may have a very efficiently organized production department. The merged concern in all these cases will be more efficient than the individual firms.
3. Fast Growth- Mergers and acquisitions often enable the company to grow at a rate faster than is possible under internal expansion route via its own capital budgeting proposals because the acquiring company enters a new market quickly, avoids the delay associated with building a new plant and establishing a new product line. Internal growth is time-consuming, requiring research and development, organization of product, market penetration and in general a smoothly working organization. Mergers and acquisitions obviate all these obstacles and thus, step up the pace of corporate growth.
4. Tax Benefits- Under certain conditions, tax benefits may turn out to be the underlying motive for merger or acquisition. These conditions relate to the tax laws allowing set-off and carry-forward of losses. It may be beneficial to merge a firm with a company having sufficient current earnings. The argument is that this tax-loss carry forward will reduce the taxable income of the new merged firm, with its obvious impact on the reduction of tax liability.
5. Diversification- Diversification is yet another major advantage of mergers and acquisitions. The argument is that a merger between two unrelated firms or the acquisition of an unrelated company would tend to reduce business risk, which in turn increases the market value. In other words, such mergers and acquisitions help to stabilize the overall corporate income, which would otherwise fluctuate due to seasonal or economic cycles. In operational terms, the greater the combination of statistically independent or negatively correlated income streams of the merged or acquired companies, the higher will be the reduction in the business risk factor and the greater will be the benefit of diversification.  

No doubt, mergers and acquisitions are one of the best ways to expand the ownership boundaries as well as enhance the market power. However, there are certain pitfalls too. For instance, a merger may not turn out to be a financially profitable proposition in view of the non-realization of potential economies in terms of cost reduction. Furthermore, the management of the two merged companies may not go along because of friction, and at times the dissenting shareholders may cause problems.