Mergers and acquisitions serve to combine two previously separate companies. A merger implies some equality in size or stature as wells as mutual consent between the combining firms, while an acquisition implies one dominant company purchasing a company of lesser size or stature and sometimes even against the wishes of the target (in the case of a hostile takeover).
While we read a lot about corporate mergers, in reality, true mergers are rare. For political reasons, acquisitions are often called mergers. This is done to ease the integration of the combined entities by phonetically placing them on more equal footing. To make this case, consider a few key elements present in most mergers:
- Prior to a combination of firms, it is agreed that money will flow from Company A to Company B and stock (or assets) will flow from Company B to Company A. When money goes one way and goods go the other way, conceptually, this sounds more like a purchase (acquisition) than a combination (merger).
- After a combination, Company A’s name is more prominent and Company A’s CEO remains in charge and sets the future strategic vision of the combined entity. This also sounds like one company is more dominant than the other.
- After some time, the merged company’s name (Company B) often gets dropped all together.
Hence, in a merger, one company is typically “more equal” than the other. In reality, most mergers are therefore truly acquisitions.