How do mergers differ from acquisitions?

Many business owners in New Jersey have heard of the terms "mergers" and "acquisitions," particularly when it comes to large business deals involving major companies. Some people may think that there's not much difference between the two or even that they are synonyms of the same actions. However, there is a difference between the definition of "merger" and the definition of "acquisition" that should be understood.

Let's start with acquisitions. An acquisition takes place when one business takes over another business (the target business,) becoming the new owner of the target business. This means that the target business no longer exists -- it has been "swallowed" by the business that bought it. Following the acquisition, the stock of the business that purchased the target business still exists and will be traded.

In contrast, business mergers take place when two equally-sized business make an agreement to combine themselves into one new business, meaning that each business will no longer be owned and operated individually. In a merger, each business gives up its stocks, and instead takes on the stocks of the newly-formed business.

Keep in mind that "mergers of equals" are relatively rare. In practice, it is often the case that one business will purchase a second business, and as a part of the deal, will allow the second business to say it is a merger, even if in actuality it is an acquisition. This is because, in the business world, being acquired -- or bought out -- is seen in a negative light.

Moreover, a merger will also take place if the chief executive officers of two businesses agree that joining their business is in both of their business's best interests. However, if the purchase is "unfriendly," meaning that the second business does not wish to be bought, it will be considered to be an acquisition.

In the end, two companies considering joining their efforts will want to think carefully if they want to pursue a merger or an acquisition. Since each action has different results and have different effects on each business, it is not a decision to be rushed into. If a business owner needs more information about the difference between a merger and an acquisition and how each choice will affect his or her business, he or she may want to consult with an attorney.

Source: Investopedia, "Mergers and Acquisitions: Definition," Ben McClure, accessed Aug. 12, 2016