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Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms are used in reference 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.

Mergers Vs. 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. Due to this reason, many acquiring companies refer to an acquisition as a merger even when it is clearly not. 

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). An acquisition takes place when one company takes over all of the operational management decisions of another. The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition).

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.

Both mergers and acquisitions have pros and cons. Mergers require no cash to complete but dilute each company's individual power. Acquisitions require large amounts of cash, but the buyer's power is absolute.

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.

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