Mergers vs. Acquisitions: What the Terms Really Mean
People often say M&A as if it were one thing. Here is how mergers and acquisitions differ, the common deal structures and what typically happens along the way.
Mergers and acquisitions are usually lumped together as M&A, and in everyday conversation the terms are used loosely. They describe different things, though, and the difference shapes how deals are structured, negotiated and announced. This is a general explainer. Any real transaction involves legal, tax and financial questions that require experienced professionals.
The basic distinction
In an acquisition, one company buys another. The buyer takes control, and the target becomes part of the buyer or a subsidiary of it. The acquired company may keep its name and brand, but ownership has changed hands.
In a merger, two companies combine into a single entity, often presented as a joining of relative equals. Sometimes a new company is formed; sometimes one legally survives and absorbs the other. In practice, many deals described as mergers have a clear larger partner, and the word is chosen partly for how it sounds to employees, customers and the public.
Common ways to structure a deal
- Stock purchase. The buyer purchases the owners’ shares and acquires the whole company, including its liabilities.
- Asset purchase. The buyer purchases specific assets, such as equipment, customer contracts and intellectual property, and generally takes on only the liabilities it agrees to. This is common in small business sales.
- Statutory merger. Two corporations combine under state law, with one surviving.
Buyers and sellers often prefer different structures for tax and liability reasons, which is one reason negotiations take time.
Why companies do deals
Companies pursue M&A for many reasons: to grow faster than they could on their own, to enter new markets, to acquire talent or technology, to reduce costs through combined operations, or to remove a competitor. Owners sell to retire, to cash out, to gain resources for growth or because a buyer’s offer is simply too good to pass up.
The hoped-for benefits are often called synergies. They can be real, but they are also easy to overestimate, and integrating two organizations is frequently harder than the deal itself.
The typical sequence
- Initial discussions and a confidentiality agreement.
- A letter of intent outlining price and key terms, usually mostly non-binding.
- Due diligence, in which the buyer examines finances, contracts, legal matters and operations.
- Negotiation of the definitive agreement.
- Any required approvals, which can include boards, shareholders and regulators.
- Closing, followed by integration.
If you are considering one
Whether buying or selling, start by understanding your goals: price, timing, the future of employees, your own role after closing. Then assemble the right team, which typically includes an M&A attorney, an accountant and, for larger deals, an investment banker or business broker. Preparation, especially clean financial records and organized contracts, tends to make the process faster and smoother. Sellers who start getting ready a year or more before they hope to close usually have more options than those who rush.
