Merger vs. Acquisition in Business - What's the Difference?

Both terms refer to the joining of two companies, they use different methods. 

A merger generally entails two business entities combining into a single entity. An acquisition refers to a situation where one business buys another and becomes one company.  

What is a Merger? 

A merger is a combination of two or more companies on a more or less equal basis. Companies often merge via an exchange of shares between shareholders of the two companies. Companies might conduct mergers to gain market share, reduce operating costs, expand into new regions or market sectors, combine firms with common products, and grow revenues and profits.  Think of a merger as a marriage between equals.

What is an acquisition? 

An acquisition occurs when one company purchases a controlling stake in another company. The acquiring company may fold the acquired company into its operations or run it as a separate entity under its name but under its ownership. 

There are several types of acquisitions. For example, a company might acquire another company's assets, which is common if the acquiree is in bankruptcy. Companies may buy competitors in the same industry, or they may buy a supplier to have more control over their supply chain. In the case of a small, private company, the buyer needs to determine how to value a small business. An acquisition can be friendly or a hostile takeover.

Key differences between mergers and acquisitions

A merger is a combination of two companies, while an acquisition involves one company purchasing another company. Here are some key differences between these two types of business transactions. 

The process 

With a merger, two or more companies agree to combine to form a new single entity. This process might be a merger of two relative equals motivated by a desire to gain market share, reduce costs, or grow revenue by not having to compete against one another on pricing in the marketplace.

In an acquisition, one company takes over the operations of another company by acquiring a controlling interest in that company. This event might involve a situation where the buyer is larger and buys a smaller but up-and-coming competitor. The buyer might also purchase a supplier company to control their inventory and the goods or material supplied by the company the buyer is acquiring.

Company name 

With a merger, the new entity formed from a combination of two or more companies will generally operate under a new name different from any of the former companies.

With an acquisition, the combination resulting from the acquisition usually does business under the name of the acquiring company. They purchased the acquiree to be a part of their company. In some cases, the acquired company may continue to operate under its name but as an operating subsidiary of the acquiring company. The buyer may do this if the company they acquired has a recognizable name and feels it would be beneficial.

Decision process 

In a merger, the decision to go through with the transaction is usually mutual. Both companies agree to merge and combine into a single company moving forward.

An acquisition may or may not involve a mutual decision. The process may involve discussions between two companies, which results in an agreed-upon price for some or all of the acquired company. Or, in some cases, the acquisition might not be friendly; this is a hostile takeover. A hostile takeover might occur when the target company trades its shares publicly, and the buyer purchases enough shares to gain a controlling interest in the company.

Financing the transaction 

In most cases, a merger involves the exchange of shares of each company’s stock into a new consolidated entity. In some cases, one or both combining entities may have to bring money to the table depending upon the exact nature of the merger or the relative size of each company. Companies may need this process to capitalize on the new combined entity properly.

In an acquisition, the buyer purchases some or all of the other company's shares. The buyer may use their cash and borrow some or all of the funds through a business acquisition loan, the proceeds of bond issuance, or some combination of these sources to finance the acquisition cost. 

Power and control 

In a merger, the two companies involved typically share the power and control over the new combined entity according to the terms agreed upon during the merger process. The two firms will typically work out who will head the combined firm and the role that the executives of the two firms will play once they finalize the combination.

In an acquisition, the buyer holds power and will be in control of the entire entity once they finalize the transaction. The acquired company's management may be left in place to run the business as a subsidiary of the acquirer, but control lies with the buyer.

Shares 

In a merger, the new combined entity will issue shares for the new entity and issue those shares to the shareholders of the two prior companies based on their ownership percentage of the new company. 

In an acquisition, the acquired company’s shares are all owned by the acquiring entity. The buyer retains control of the purchased company with no impact (other than price of shares) on the purchasing company’s stock. The buyer generally pays for the acquisition in cash obtained from the buyer’s cash reserves or another type of financing (reserves, debt, etc.).

Merger vs. Acquisition: a Comparison