Mergers vs. Acquisitions: An Overview

Mergers and acquisitions (M&A) are forms of corporate restructuring that are extremely popular. The motive for wanting to merge with or acquire another company comes from management trying to achieve better synergy within the organization. This synergy is thought to increase the competitiveness and efficiency of the new company.

Mergers and acquisitions are also ways for a company to acquire capabilities it either cannot or does not want to develop internally, as well as to take over a company viewed as underperforming or undervalued to unlock value by changing operations or taking the company private.

Key Takeaways

  • Mergers and acquisitions are two forms of corporate restructuring.
  • Mergers combine two companies into a new entity. They are usually all equity.
  • Acquisitions occur when one company buys enough equity in another to become its owner. These can be all cash, all equity, or more commonly, a combination of both.
  • The acquisition of debt can also be used as part of an acquisition strategy.
  • A key point of success for a merger or acquisition is how the two companies are combined once they become one entity on paper.


Mergers usually occur between companies that believe a newly formed company can compete better than the separate companies can on their own. The boards of the two companies approve a combination of the businesses, as well as the terms.

Mergers usually occur on an all-stock basis. This means the shareholders of both merging companies are given the same value of shares in the new company that they owned in one of the old companies. Therefore, if a shareholder owned $10,000 worth of shares before the merger, they would own $10,000 in shares of the newly formed company after the merger. The number of shares owned would most likely change following the merger, but the value would remain the same.

When two companies merge, they are often similar in size, scope, and capability. Therefore, this type of merger is often referred to as a "merger of equals." The primary reasons for mergers include gaining market share, reducing competition, improving costs and efficiency, and increasing profits.


Mergers are rarely a true merger of equals, however. More often, one company indirectly purchases another company and allows the target company to call it a merger to maintain its reputation. When an acquisition occurs in this way, the purchasing company can acquire the target company using all stock, all cash, or a combination of both.

When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's balance sheet. The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100%, the minority interest is identified in the liabilities section of the parent company's balance sheet.

When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company.

When evaluating a possible acquisition, a company needs to evaluate the target firm's debt load, current or future litigation, all financials, and the accuracy of the price.

In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company.

When an acquisition is on friendly terms, both companies agree to the one company buying a large stake of the acquired company. Oftentimes, acquisitions are not agreed to mutually, and these types of acquisitions are known as takeovers.

The reasons for an acquisition are fairly similar to those of a merger. Both companies, or at least one, believe there are significant benefits to gain from the combining of the two entities.

One difference of an acquisition is that a company might believe that the firm they are looking to buy is not performing well and could be performing better. In this instance, they look to buy that company in the hopes of turning it around to improve its profitability.

Special Considerations

Regardless of whether a corporate restructuring is a merger or an acquisition, a critical point of success is the process of how the companies are implemented into one over time after they are combined on paper.

Companies have different cultures, different management, and different operational procedures. It can be a difficult task to combine these and to cut away what doesn't work. Many mergers and acquisitions have failed because management was not successfully able to combine the two companies.

For this reason, it is imperative that thorough due diligence of both companies is done beforehand, key areas and weaknesses are discovered, and that management has a clear and timely plan on how to combine the companies so that the newly made company can operate efficiently, bringing positive results to all stakeholders.