Understanding the Difference between Merger and Acquisition
When two companies decide to form a strategic partnership for growth, they can do so either by merger or acquisition. While the two terms are often used interchangeably, they represent distinct and different transactions. Here’s a closer look at the difference between merger and acquisition.
What is a Merger?
A merger is a decision by two or more companies to combine and form a new entity. In other words, it’s a legal consolidation of two or more companies that results in the formation of a new legal entity. The new entity will have a distinct name, brand, and often a new management team or board of directors.
One of the benefits of a merger is that it allows companies to gain access to each other’s unique assets, expertise, and technology. Mergers usually happen when two companies are of similar size and are looking for ways to expand or diversify their businesses.
What is an Acquisition?
An acquisition, on the other hand, is when one company acquires another and becomes the new owner. In this type of transaction, the acquiring company buys a controlling stake, or all of the shares, of the target company.
Acquisitions are often preferred by larger companies that are looking to expand their market share or enter new markets. They can also be used to eliminate competition, acquire talent or technology, or realize cost savings through economies of scale.
The Key Differences
The key difference between a merger and acquisition is in the resulting legal entity. In a merger, two or more companies come together to form a new entity, while in an acquisition, one company buys another and becomes the new owner.
Another difference lies in how the transaction is structured. In a merger, both companies agree to the terms and conditions of the new entity, which usually requires the approval of shareholders and regulators. In an acquisition, the acquiring company usually has more control over the process, and the target company may not have a say in the matter.
Conclusion
In summary, mergers and acquisitions are both strategic transactions that companies use to achieve growth, diversification, and market consolidation. While they often serve a similar purpose, they represent different types of transactions that have varying implications for the companies involved. By understanding the differences between them, companies can make informed decisions about which option is best for them.
Table difference between merger and acquisition
| Merger | Acquisition |
|---|---|
| Occurs when two companies combine to form a single company | Occurs when one company takes control of another company |
| Both companies involved in the merger are usually of roughly equal size and status | The acquiring company is usually larger and more powerful than the acquired company |
| Both companies involved in the merger usually contribute assets and liabilities to the new company | The acquired company’s assets and liabilities become part of the acquiring company’s assets and liabilities |
| An entirely new company is created as a result of the merger | The acquiring company retains its identity and brand, while the acquired company’s brand may be absorbed or dissolved |
| The management of the new company is usually shared between the two previous companies | The acquiring company’s management takes over the management of the acquired company |