Difference between a Merger and an Acquisition

Updated on May 27, 2017

How many times have you heard people use the terms “merger” and “acquisition” interchangeably? Do you think they are right in doing so? Technically, from the outside, they may look like the same thing, yet the effects these two procedures have on employees and management are wildly different. Spruce up on your business vocabulary and learn to tell the difference between merger and acquisition.

Definitions

Merger

A merger happens when two existing companies come together to form a new company. The transaction is supposed to take place on equal terms and the management teams of both companies are supposed to have combined ownership and control over the new company’s operations. There are several types of mergers:

  • Vertical merger : combines two companies that contribute with different parts in the production process of a good with the purpose of getting more of the production units under the same brand
  • Horizontal merger: combines two companies in the same industry with the purpose of creating one bigger company and getting a bigger market share
  • Market extension: combines two companies that offer roughly the same product but in different markets with the purpose of creating one bigger market for the same company
  • Product range extension: combines companies that offer different types of products with the purpose of creating a wider product range
  • Conglomerate: combines companies that have nothing in common but that will be managed under the same brand

In reality, the transaction is never as friendly as text books have you believe. This is mainly due to the fact that no CEO will willingly agree to give up on his authority and share it with the other management team. Among the benefits of a merger are the increase of the market share, a combination of strengths and resources, and a considerable profit rate increase.

Stocks of both companies are taken off the market and are replaced by the stocks of the newly created company.

An acquisition is a business term that refers to the purchase of a company by another company. The main beneficiary from the acquisition is called the acquiring company. The company being acquired is called the target company. This usually takes place when a bigger company takes over a smaller company. Ownership goes to the acquiring company and so does control of resources and profit. The acquiring company gets the assets and stocks of the target company.

The reasons to purchase another company are numerous and varied:

  • To take out a competitor
  • To increase market share
  • To benefit from strengths and expertise in-house
  • To grow enough to meet the demands of a larger market

The target company is incorporated in the revenue stream of the acquiring company. This means that their performance and productivity were enough to catch the eye of a bigger player. The later is looking to grow without a bureaucratic hassle and considerable time investment. An already existing smaller company has all the needed mechanisms set up, meaning the job is half done. The management decisions remain with the acquiring company.

Merger vs Acquisition

So what is the difference between a merger and an acquisition?

A merger is supposed to be done on equal terms, whereas an acquisition is one company completely swallowing up another company. With a merger, the management team is supposed to be made up of people from both former companies. With an acquisition, the acquiring company’s management structure does not change and takes control of the new company’s resources.

After a merger, the shares of the two companies are taken off the market and are replaced with the shares of the newly formed company. This does not happen in the case of an acquisition, with the acquiring company keeping its shares.

The reasons why two companies merge are to create a bigger company with more resources and to have a bigger market share. A company may acquire another one to take out a competitor and to benefit from the other company’s resources without having to implement everything from scratch.

People usually view a merger as a nicer type of commercial action, whereas an acquisition has something hostile about it. This is why many acquisitions are passed off as mergers in the eyes of the press.

Comparison Chart

MergerAcquisition
Is a commercial transaction done on equal terms between two companiesIs a commercial transaction in which a bigger company takes over a smaller one
Results in a common management teamResults in the management team of the acquiring company controlling all assets and holding decision power
The shares of the separate companies are called back and replaced with shares of the newly formed companyThe acquiring company keeps its shares and those of the target company are taken off the market
Sounds better as it appears to be of common accordSounds more hostile and is usually passed off as a merger in the eyes of the press