What is the Difference between a Merger and an Acquisition

John Colley MBA, MA(Cantab)
A free video tutorial from John Colley MBA, MA(Cantab)
Investment Banking | Business| Entrepreneurship | Finance
4.5 instructor rating • 31 courses • 92,512 students

Lecture description

These two terms are not the same although often used inter-changeably.  This lecture explains the difference between the two.

A PDF of the Slide Deck is available to download from the Resources Section of this Lecture.

Learn more from the full course

Mergers & Acquisitions - M&A, Valuation & Selling a Company

Mergers and Acquisitions - Step by Step M&A, Company Valuation, Negotiation Skills, Business Plans and Finance

07:07:10 of on-demand video • Updated April 2021

  • Approach the sale of their company with greater confidence
  • Better understand the role of Advisers and how to manage them
  • Gain valuable insights into the Sales Process to avoid making expensive mistakes
  • Better understand Corporate Valuation
  • Gain an introduction to Negotiation and Term Sheets
  • Find out what is important to both sides in a Management Buyout (MBO)
English [Auto] What is the difference between a merger and an acquisition it's important to understand this because these terms are often used as if they are synonymous as if they're actually mean the same thing. But strictly speaking in real terms they are very different. A merger is when two companies often of comparable size joined forces to create a new joint business. Now in theory both are equal partners and that's why these combinations are sometimes called a merger of equals. Very often you'll see the jobs the main jobs of the board being split relatively equally so if one company provides the chairman the other company might provide the CEO. Sometimes there a joint CEO appointments although these are seldom successful. So it's genuinely a combination of two companies. The companies agreed to do the deal with one another. There's often a lot of negotiation about the terms of the deal although they are of comparable size. There will be a lot of jockeying to get the right split of the value. Its very rare that it's exactly 50/50. It might be 60 40 or 55 45 but there's normally one side that tries to get a bit of an edge over the other and then both sets of shareholders have to give their approval to the combination of the deal when the deal is closed the two businesses are then merged into a new corporate entity and this is normally done by having a new coach at the top which then takes ownership of both businesses whose day to day operations and systems and everything can then be combined as they see fit. A good example of this is when Chrysler and Daimler-Benz got together to form Chrysler time. A good example of this is when Chrysler and dimer Benz combined to put their businesses together that was genuinely a merger of equals. Now very often a deal is referred to as a merger rather than acquisition when actually it's an acquisition and the main reason for doing that is to make the buying company that make the buying company be able to present the deal has a much more friendly deal to the target company shareholders and management. So they actually suggested and put it forward in public as a merger whereas in fact the buyer is acquiring and taking over the target. So what do we mean by an acquisition when an acquisition is exactly that one company acquires another company. Now very often this is a large company buying a smaller company. But when this happens a new company does not emerge the target company is subsumed into the buyer. And this is often referred to as a takeover. And the way this works is that the buying company acquires a majority stake or very often up to 100 percent in the target firm and the target company doesnt change its name or corporate structure or anything but becomes a wholly owned subsidiary of the company that's made the acquisition. Now how the operations are then dealt with from there is a matter for the business. But in legal terms the target company has gone and gone underneath the corporate entity and the corporate ownership of the buying company now and acquisition can be paid for in cash or in stock or a combination of both. Sometimes you see more elaborate arrangements you see low notes you get buy outs you get all sorts of different details but essentially the exchange is cash or paper. In return for the business and assets of the target company. So thats the difference between a merger and acquisition is important from the outset to understand that there is a difference. And what the subtleties of that difference are.