The terms merger and acquisition are often confused, when in fact there are some differences between them, especially for the smaller company. For the larger company and for shareholders, the differences are not great.
Merger: a merger is when two companies decide to join together to form a single company. As we have discussed before, a merger produces a bigger company with a wider range of services or products. On top of that, both companies keep their existing customers, who can also benefit from being part of a larger company.
As a rule, a merger gives a company greater stock market value, and shareholders come out ahead. Generally, the executives of both companies remain part of management and keep making decisions, and both companies may even keep their names.
Acquisition: in an acquisition, there is usually a large company that wants to buy a smaller one, so the company being bought effectively ceases to exist and becomes part of the buyer.
In some cases, the owner of the acquired company joins the buyer’s management. In others, they simply receive the agreed payment and leave the company.
If the company being acquired agrees to the sale and cooperates with it, this is known as a friendly acquisition.
In other cases, a company decides to buy another, but the smaller company does not want to be bought. If the buyer remains interested, the process can turn into a hostile takeover, in which the buyer may approach the board and the shareholders and force the smaller company to sell.
In every case, merger or acquisition, friendly or hostile, the result is a rise in the share price, although a lack of cooperation from the company being bought can sometimes put the company’s stock market value at risk.
Further reading
- Factors behind the success and failure of a merger or acquisition
- Company mergers: the best time to invest
Featured image: Flazingo Photos, CC BY-SA 2.0, via Flickr.
