Acquisition vs. Merger: Definition, Types, and Differences

By Indeed Editorial Team

Published May 9, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Acquisitions and mergers are two significant changes that can happen to a company. There are many reasons why mergers and acquisitions may take place. Learning about the difference between acquisitions and mergers can help you to better understand the changes associated with acquiring or merging a company. In this article, we define acquisitions and mergers, review key differences between acquisitions and mergers, share types of mergers, and provide reasons for acquisitions.

Acquisition vs. merger

To determine the key differences between an acquisition vs. merger, it is essential to define each:

What is an acquisition?

An acquisition occurs when one company takes control of another. For example, when Company A takes control of Company B, Company B no longer exists, and only Company A remains. Typically, one company purchases another. There are a few reasons a company may want to acquire another. One reason might be because the other company has a better supplier, and the first company wants to reduce its production costs. Companies might also want to obtain their competitors' technology or increase their market share.

What is a merger?

A merger occurs when two companies join to form a new company. This means that they have new ownership and management in place. Usually, companies agree to a merger with mutual benefits, such as reducing operational costs, expanding into new areas, or increasing profits. Companies involved in a merger are often the same size and operate within the same segment. Companies enter a merger because they want to combine their resources and market share to produce higher profits together.

Key differences between acquisitions and mergers

Acquisitions and mergers are common business terms that people sometimes use interchangeably because they both refer to the joining of two companies. It is essential to know there are key differences between them. A merger occurs when two separate companies join to create a new company. An acquisition occurs when one company takes over another company by purchasing it. Here are a few differences between acquisitions and mergers:

Process

The process of mergers and acquisitions can vary substantially. In a merger, companies often join in more amicably, and they usually exchange no money. There is usually money exchanged in an acquisition, as one company is buying the other. Because the purchased company no longer exists after the acquisition takes place, the company acquiring is the one that benefits from the acquisition. The company acquiring may also contribute to the purchase of the company through stocks, or by acquiring the company's debt.

Power

There is a different balance of power between an acquisition and a merger. In a merger, both parties benefit from joining, so there is an equal sharing of power and resources. In an acquisition, the company buying the other usually holds all the power. The company acquiring also receives additional benefits like more stock, capital, shareholders, new customers, and greater market reach.

Stocks

A merger and acquisition affect stocks and shareholders differently. A merger may affect stock prices for the days leading up to the merger, depending on the companies involved and current macroeconomic conditions. Once the merger occurs, shareholders may experience positive results and dividends over the long term. Depending on the size of the companies involved in the merger, shareholders may also experience changes in their voting powers. The company may also offer new stocks in the new company's name. In an acquisition, the purchasing company gains control of all the stocks from the company they acquired.

Related: Guide: How to Become a Stockbroker

Size

In a merger, the companies joining are typically of the same size. They are also usually within the same segment. For example, two companies that both offer tutoring services may want to join together to combine their tutors into one company while expanding the size of the area that they offer services in, resulting in higher profits. In an acquisition, one company is more likely larger than the other. This means that the acquiring company is usually larger, with more capital and resources, as they purchase the company they are acquiring.

Resulting entity

Although both mergers and acquisitions result in companies joining together and combining their resources, there are some key differences in the resulting entity. For a merger, both companies bring their best resources and aspects to create the merged company. This company gets a new name, although companies may also opt to combine their names. In an acquisition, the acquired business no longer exists. This means that the acquiring business remains, with the same name, and uses the assets and resources from the company it acquired.

Benefiting party

In a merger, both companies benefit from joining companies as they are uniting their resources to improve profit and market share for the company. Mergers are typically mutually agreeable. In an acquisition, the purchasing company benefits, as they get access to the other company's capital, stock, resources, and market share under their name. The acquired company does not gain any benefits as they no longer exist after the acquisition takes place.

Consent

In a merger, both parties consent to join, creating a more amicable process as the companies discuss the terms of the merger. This can be different in an acquisition. In a friendly acquisition, the smaller company has made itself available for sale and is consenting to be purchased. In a hostile takeover, the smaller company does not consent to an acquisition. A large company may acquire it through influencing shareholders to have management agree to an acquisition, or through purchasing more than 50% of the smaller company's stock to gain power.

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Types of mergers

There are several types of mergers. Within these types, there are two methods for financing mergers. One option is a purchase merger, in which the two companies exchange money to merge. The other type is a consolidation merger, in which both companies become purchased under the name of a new company. Types of mergers include:

  • Horizontal merger: This occurs when two companies merge with a similar product or service and customer base. For example, two coffee companies may join to create one coffee company under the same name.

  • Vertical merger: A vertical merger occurs when a supplier and a company merge.

  • Congeneric merger: A congeneric merger occurs when two companies with the same customer base yet offer different, complementary products or services merge. An example of this might be an internet service provider merging with a telephone service provider.

  • Market-extension merger: A market-extension merger is when two companies merge that sell the same products yet in different markets to gain market share. For example, the companies may share the same product in different countries, and combine it into one company that sells it to both countries.

  • Product-extension merger: A product-extension merger occurs when two companies share the same market yet sell different products merge. For example, a hair product company may merge with a hair tool company to offer more products to their market of individuals interested in purchasing hair care and styling products.

  • Conglomeration: A conglomeration occurs when two companies that do not have a similar market or product offering merge. Companies may choose to enter a conglomeration for increased market share or cross-selling opportunities.

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Reasons for acquisitions

There are several reasons why a company may want to acquire another through purchasing. These include:

  • Acquiring resources: A company may want to acquire another to access its resources. These resources may include physical resources, supplies and stock, intellectual property and technologies, skill set, and market positioning.

  • Consolidating: A company may want to purchase a competitor company to remove their competition from the market and capture their market share.

  • Accelerating: A larger company may purchase a smaller company to accelerate its growth. This means they might use their superior resources, such as technological processes or materials and market positioning to get the smaller company's products to market more quickly.

  • Speculating: If a larger company notices that a smaller company has developed a new, interesting product, then they may choose to acquire this product by purchasing the company. This helps the acquiring company take advantage of the expected growth for that product and its associated profits.

  • Value creating: Companies complete this type of acquisition when they are looking to sell the smaller company they acquired. For example, Company A may acquire Company B, boost its profitability and market share by using their knowledge and resources and then sell it for a profit.


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