Understand Mergers and Acquisitions: What is a Merger vs Acquisition?

In the world of business, mergers and acquisitions (M&A) are terms that are often used interchangeably. However, they refer to different types of transactions, each with its own unique features and benefits.

A merger is the process by which two or more businesses unite to create a new legal entity. An acquisition, on the other hand, occurs when one company purchases another, resulting in the acquired company becoming a part of the acquiring company. While both mergers and acquisitions involve two or more companies coming together, they differ in significant ways.

For example, mergers may occur when two or more business entities agree to combine their operations to form a new business. Conversely, an acquisition occurs when one company assumes control of another. Acquisitions may be friendly or hostile, while mergers are often known as a merger of equals.

There are many motives for acquisition or merger, including the desire to enter new markets, access new business assets, or create a new business entity. Whatever the reason, it’s important to understand the difference between a merger and an acquisition to determine which type of transaction is right for your business.

Key Takeaways

• A merger is when two or more businesses come together to establish a new legal structure.
• An acquisition is when one company buys another, integrating the bought company into the purchasing entity.
• Mergers may occur when two or more business entities agree to combine their operations to form a new business.
• Acquisitions may be friendly or hostile, while mergers are often known as a merger of equals.
• The motive for an acquisition or merger may be to enter new markets, access new business assets, or create a new business entity.

Key Differences Between a Merger and an Acquisition

When it comes to business expansion through M&A, there are two primary methods to consider: mergers and acquisitions. While the two terms are often used interchangeably, they are in fact unique approaches to combining businesses. In simple terms, a merger occurs when two or more companies agree to combine their business operations and assets to create a new legal entity. On the other hand, an acquisition occurs when one company purchases another company.

A merger can be motivated by the desire to enter a new market or create a new business entity. In a vertical merger, companies in the same industry but at different stages of the supply chain merge to create a streamlined and efficient supply chain. In a horizontal merger, companies in the same industry merge to gain market share and increase their bargaining power with suppliers and customers. A reverse merger, on the other hand, happens when a private company merges with a publicly listed shell company to go public without an initial public offering (IPO).

Acquisitions may be friendly or hostile, with hostile takeovers occurring when the acquiring company makes a bid for the target company without the support of the target’s board of directors. The motive for an acquisition can be to gain access to new markets, products, or technology. Acquisitions may also enable a private company to become publicly traded. With an acquisition, the acquiring company takes over another company and absorbs its business operations and assets, while the acquired company becomes a part of the acquiring company.

One key difference between a merger and an acquisition is that a merger requires two or more companies to come together and form a new legal entity, while an acquisition occurs when one company purchases another company. Another difference is that in a merger, the two companies are on equal footing, whereas in an acquisition, the acquiring company is usually larger and more powerful than the company being acquired. You can consult a corporate lawyer to become more familiar with the process.

Differences Between the Two

There are also several other differences between mergers and acquisitions. For example, in a merger, both companies’ shareholders become shareholders in the new entity, while in an acquisition, the target company’s shareholders may or may not become shareholders in the acquiring company. Additionally, in a merger, new shares are issued for the new legal entity, while in an acquisition, existing shares in the acquiring company may be used to pay for the acquired company.