Mergers vs. Acquisitions: An Overview

Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them.

A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.

Key Takeaways

  • A merger occurs when two separate entities combine forces to create a new, joint organization.
  • An acquisition refers to the takeover of one entity by another.
  • The two terms have become increasingly blended and used in conjunction with one another.

Mergers

Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition). Mergers require no cash to complete but dilute each company's individual power.

In practice, friendly mergers of equals do not take place very frequently. It's uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.

Typically, mergers are done to reduce operational costs, expand into new markets, boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope.

Due to the negative connotation, many acquiring companies refer to an acquisition as a merger even when it is clearly not.

Acquisitions

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company. Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. As a result, acquiring companies may refer to an acquisition as a merger even though it's clearly a takeover. An acquisition takes place when one company takes over all of the operational management decisions of another company. Acquisitions require large amounts of cash, but the buyer's power is absolute.

Companies may acquire another company to purchase their supplier and improve economies of scale–which lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines. Companies engage in acquisitions to obtain the technologies of the target company, which can help save years of capital investment costs and research and development.

Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have become increasingly blended and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.

Real World Examples of Mergers and Acquisitions

Although there have been numerous mergers and acquisitions, below are two of the most notable ones over the years.

Merger: Exxon and Mobil 

Exxon Corp. and Mobil Corp. completed their $81 billion merger in November 1999 following approval from the Federal Trade Commission (FTC). Exxon and Mobil were the top two oil producers, respectively in the industry prior to the merger. The merger resulted in a major restructuring of the combined entity, which included selling more than 2,400 gas stations across the United States. The joint entity continues to trade under the name Exxon Mobil Corp. (XOM) on the New York Stock Exchange (NYSE).

Acquisition: AT&T Buys Time Warner

On June 15, 2018, AT&T Inc. (T) completed its acquisition of Time Warner Inc., according to AT&T's website. However, due to intervention by the U.S. government to block the deal, the acquisition went to the courts, but in February 2019, as reported by the Associated Press, the "federal appeals court cleared AT&T’s takeover of Time Warner."

The $81 billion acquisition will realize cost savings for the combined entity of $1.5 billion and revenue synergies of $1 billion, which are expected to be realized within three years of the close of the acquisition.