The terms "merger" and "acquisition" often blend together for entrepreneurs even though the words mean slightly different things.
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The difference is more than just a nuance of vocabulary. A failure to appreciate the distinctions between them can result in significant consequences for any company that engages in M&A activity.
The difference between a merger and an acquisition should be particularly important for small business owners. If your company is consolidated with another firm, the language you use to describe the event will communicate volumes to the business community and the general public.
A merger is the consolidation of two companies that are similar in size and strength. That's why a merger is also commonly referred to as a "merger of equals".
After the merger, the companies move forward as a single entity rather than as two distinct businesses. If the companies being merged are corporations, each company's stock will be surrendered and replaced by stock in the new company. One of the reasons mergers are attractive is because company consolidations inevitably lead to redundancies. In a merger scenario, determining which leadership team and employees stay on with the new company is tricky, especially if the original companies were truly equal in size and strength.
An acquisition is the consolidation of two, unequally sized companies.
One company is clearly more dominant than the other and when the two are consolidated the weaker company is assimilated into the larger one. For all intents and purposes, the smaller company ceases to exist. The larger company's stock continues to be traded without interruption, while the smaller company's stockholders are bought out as part of the acquisition process.
Since the larger company is in the position of power, their leadership team and employees are retained, although the surviving company may also employ some of the acquired company's workers to augment its workforce.
Unfortunately, the world of mergers and acquisitions is rarely as clear cut as it seems. Since the thought of being acquired tends to be seen in a negative light, acquisitions are frequently called mergers as a way for the weaker company to maintain its dignity.
Likewise, straight up business purchases are often called mergers due to the PR value that accompanies the word. However, if an acquisition occurs on less than friendly terms, it will never be called a merger. It will always retain the label of an acquisition so it is abundantly clear which company is in the driver's seat.