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Overview of Private Equity vs. Mergers and Acquisitions

By Shuishan Xiao, Anthony Borgese (UPenn) and Kritika Venkateswaran, Sreeja Mamillapalli, Aman Singla (NYU)


Private Equity

Private equity is a form of private financing in which funds and investors directly invest in companies or engage in buyouts of such companies to secure strong returns on behalf of their investors over a predetermined lifetime. The nature, size and structure of the investment can vary significantly but PE firms typically achieve returns by altering capital structure, management, or operational performance. Private equity encompasses a wide range of fund strategies such as venture capital, leveraged buyouts, secondaries, infrastructure, growth capital, mezzanine financing, real estate.


Mergers and acquisitions (M&A) is the consolidation of companies or assets to achieve synergies through various types of financial transactions such as mergers, acquisitions, consolidations, tender offers, or purchase of assets .

Key Differences

Private Equity and M&A function by different approaches toward ownership. Although the two types may revert to the same investors and purchase goals, the purpose of existence , business model, acquisition method and processes vary considerably from each other.

Business Models

Private equity (PE) and firms involved in Mergers & Acquisitions (M&A) activity differ in several aspects with the key being their business models. In enterprises that engage in M&A activities, the acquirer usually takes over to create benefits, grow the target company and work to the service of the customers. Thus, such acquisitions offer synergistic routes for companies. On the other hand, the business model for PE firms concerns making the right purchase decisions to enhance a firm’s value over a period of time and eventually secure a financially sound exit. Therefore, private equity investors operate to develop/transform a business (short-medium term) whereas in M&A, companies buy out other companies that may fit their long term goals and will work together to create synergies. Furthermore, while M&A transactions last ‘forever’ with maintained ownership upon the acquisition, PE firms invest with the end goal of exiting using strategic advantage.

Pre-deal focus

There is a fine line between how M&A purchases and PE acquisitions occur. In M&A, acquirers eye a specific target firm that fits their long term goals and would be an invaluable addition to their company. Eventually, they fix a deal and proceed with the acquisition. However, PE investors keep an eye on a range of companies within a specific industry and build relationships with such future target firms until they are ready for purchase, making the process a lot more structured and pre-planned unlike M&A. In a M&A transaction, integration is key to success as companies will decide and discuss how to integrate teams, leaders, managers and projects effectively whereas the process is far more aggressive for PE. PE investors actively show interest in the board of directors and with the CEO to also call for executive decisions.

Post-deal execution

The tasks included when acquiring or investing in another company differ significantly between PE and M&A. PE has a series of tasks including sourcing a deal, fundraising, screening & making investments, managing portfolios and the exit strategy. Sourcing involves finding and assessing an investment opportunity and is followed by an investment proposal. Fundraising is the process of the PE firm receiving money from other investors. Once the final bidding price is determined, the seller and their advisors choose a winning bid to proceed with. Since a PE firm usually takes on a lot more debt while acquiring a company, it wants to ensure that it is able to pay the interest on the debt and pay the principal in the end. Its main focus is on generating a high internal rate of return (IRR) and creating a high exit multiple.

In PE, the focus of the acquirer is to extract as much value as possible from the target company and sell it in the future depending on the timeline. The PE firm usually tries to find ways to cut costs, reduce capital expenditures, minimize risk in order to generate stable cash flow, keep a small but strong management structure as well as a solid base of assets to use as collateral for the debt they have taken on for the LBO (leveraged buyout).

In contrast to the focus on governance and ownership in the post transaction phase of a private firm M&A deals place an emphasis on integration strategies. Initially, management of the firm in an M&A transaction must amalgamate the two (or more) previously separate organizations strategically, organizationally, culturally and technologically. For example middle management and business leaders may seek to create integration teams or integration programs. Then in M&A, tasks that are usually completed include pitchbook creation, data modelling and analysis.


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