Mergers vs acquisitions: Comparing the differences

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Mergers and acquisitions, or M&As, is a phrase that is used to describe when two organizations come together to become one. This article explores some of the distinctions between a merger and an acquisition – as well as why a large number of what are referred to as ‘mergers’ end up looking a lot like acquisitions in reality. 

Acquisitions: One firm buying, and amalgamating the other

the term acquisition is used to describe a situation where one company (the acquirer), acquires another. The acquired firm is then typically incorporated into the operations of the acquiring company. 

Mergers: Two firms coming together to form one

While in an acquisition it is typically a larger firm that buys a smaller one, in a merger, it is two companies that come together and decide to merge into one. There is less of a size difference in a merger, and the combined firm draws from both parts of the originating companies.

Key differences between mergers and acquisitions

While it can be hard to precisely determine what constitutes a merger and what constitutes an acquisition, some of the key distinctions include:

The relative size of the two companies

The term merger is typically used to describe two approximately comparable-sized firms coming together. In comparison, the term acquisition typically is used to characterize a larger firm combining (or acquiring) a smaller firm.

Who is instigating the combination

Another distinction comes from who is initiating the combination process. The term merger implies both sides of the management are involved in the decision to combine, whereas an acquisition more likely is instigated by one side. 

Who will be on the management team after the firms join together

Another distinction between a merger and an acquisition is who the management are of the combined firm. Having management comprised entirely of the managers of one firm is characteristic of a merger, while having management from both sides is more characteristic of a merger. 

How is the joining of the firms financed

Another potential distinction is how the combination is finance. Buying a firm in cash is more characteristic of an acquisition while combining the shares is more characteristic of a merger. 

But: Many 'mergers' look a lot like acquisitions in practice

While it is possible to make some typical distinctions between mergers and acquisitions, it is also important to recognize that combinations that on the surface would appear to resemble an acquisition are often described by the two firms that come together as a merger.

Part of this may be that describing the combination as a ‘merger of equals’  may help reduce employee concerns. In such situations, it is useful to look at who actually retains control of the firm – whether for example the management of the combined entity is entirely comprised of managers from one firm. 

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