Business, Legal & Accounting Glossary
Mergers and acquisitions are common in today’s corporate finance world. However, strictly speaking, mergers and acquisitions are distinctly different concepts.
In comparison, a merger occurs when two firms mostly of the same size agree in principle to act as a single new company, instead of remaining separately operated and owned. This type of merger is specifically called ‘merger of equals’. In mergers, both merging companies surrender their stock and that is replaced by freshly issued new company stock.
A purchase is said to be an acquisition when a business takes over another company such that, it becomes the indisputable new owner. In legal terminology, the target company no longer exists as a separate entity after an acquisition; buying company literally swallows up target company. It is the buyer’s stocks which are traded after an acquisition.
In reality, mergers of equals are hard to come by. Often a company buys out another company in what is a technical acquisition; however, as part of the concerned business deal, the acquired firm is allowed to publicly proclaim it as a merger of equals. This is because the act of being bought out is often looked at negatively in the business world. Mergers are said to have occurred when CEOs of both concerned companies amicably settle for it in their best interests. In case it is an unfriendly deal (with a hostile and unwilling party) it is termed as an acquisition. Thus in practice, whether a purchase is a merger or an acquisition depends on that way in which it is communicated and received by shareholders, the board of directors and employees of the target company.
| Type of merger | Characteristic |
| Horizontal merger | Between two competing companies who share same markets and product lines |
| Conglomeration | Between companies who do not share any common business areas |
| Vertical merger | Between a supplier and a company or between a customer and a company |
| Product-extension merger | Between two companies, which sell related products in same markets |
| Market-extension merger | Between companies selling same products in markets, which are not same |
Depending on the mode of financing mergers are further classified into purchase mergers and consolidation mergers.
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This glossary post was last updated: 11th August, 2022 | 0 Views.