What Are Mergers and Acquisitions?

By James Brumley

In simplest terms, acquisitions and mergers – often just called ‘M&A’ – is the uniting of two companies to become one company… and hopefully a better company for it. However, a merger is not technically the same thing as an acquisition.

Acquisition: An acquisition occurs when one company makes on outright purchase of another company by buying its shares with cash, with shares of the acquiring company, or a combination of cash and stock. The acquisition ‘target’ is viewed as an organization that offers something beneficial to the acquiring company (perhaps a technology, patent or existing customer base).

Investors view an acquisition of a company they are shareholders of as a positive event, since the ‘tender offer’ for those shares is usually much higher than the current market price for their stock. For that same reason, the management of an acquired company may also be receptive to such a purchase.

Merger: A merger generally accomplishes the same thing as an acquisition, though the logistics are slightly different. Mergers simply join two companies into one larger one, again based on the assumption that the resulting organization will be ‘greater than the sum of its parts’. There is no immediate payoff though, like there typically is with an acquisition.

A merger generally means shares of one company are converted into shares of the other company, so those investors’ actual dollar amounts invested won’t change… just the stock ticker.

Hostile Takeover: Though a rarity anymore, the term ‘hostile takeover’ refers to an acquisition that is unwelcome and undesired by the company being acquired. This purchase is not facilitated through an offer at a set per-share price, but rather is the result of the acquiring company buying enough shares in the open market to take a controlling interest of the acquired company.

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