From a general perspective, mergers and acquisitions might not seem all that different. One company decides they want to own another company, or two companies decide to combine forces. It really doesn’t seem like there is much difference, practically speaking.
But from a legal and financial standpoint, the difference between a merger and an acquisition is quite profound indeed. What happens legally and financially when these two companies agree to co-mingle funds, employees and property? Here are some of the things you can check to see whether the transaction is a merger or an acquisition, and how the difference might affect you and others.
The New vs. The Old
When one company buys another, it is said to have acquired the other company. This is no different than a driver acquiring a new car. The acquired company belongs to the buyer.
Practically speaking, the buying or acquiring company is still the same. They may choose to allow the acquired company to operate normally as a subsidiary. They might also choose to liquidate, wrap-up or absorb the acquired company. The one element that doesn’t change is the acquiring company or the buyer doesn’t disappear. The first company remains intact.
The Old vs. The New
In a merger, on the other hand, a new company comes into being and absorbs the property and liabilities of the other two. This is important for legal and financial purposes because the owners of the two merging companies will end up owning a share of the new, merged company. This often happens with large highly capitalized corporations, mainly because there are no other organizations large enough to acquire one or the other.
Acquisitions are More Common
Due to the intricacies of corporate law and the fact that synthesizing the obligations of organizations that might be separated by distance, jurisdiction and markets, the practice of one company buying another is more common than two companies merging to form a new organization. The two terms are often confused and used interchangeably, but the reality of inter-company transactions are quite different for both shareholders and management.
Acquisitions are rarely transactions between equals. Mergers, on the other hand, are almost always conducted between two companies in similar markets, and often performed in order to obtain a commanding market presence. This often invites anti-trust scrutiny and the potential for government denial of the proposed deal.
Mergers can’t be conducted between fewer than two companies. Acquisitions, on the other hand, can be performed by individuals, investment groups, banks or funds. Sometimes companies are acquired for their property, or even their losses. This has become a more common practice lately.
Publicly traded companies or companies that are facing financial problems can often be acquired by individuals or organizations without the consent of management. This used to be referred to often as a “hostile takeover.” There are few restrictions on the purchase or sale of stock, although there are regulations when attempting to acquire an entire company.