Mergers and Acquisitions

Mergers and acquisitions (M&A) refers to the consolidation of companies. A merger is defined as the combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. The term M&A also refers to the department at financial institutions that deals with mergers and acquisitions.

Though the two terms are used as synonyms they do differ. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. A merger takes place when two firms, often of about the same size, agree to go forward as a single new company. This kind of action is referred to as a "merger of equals." Therefore the stocks of both companies are surrendered and new company stock is issued in its place. An example of a merger is both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

Acquisition refers to the consolidation of two companies that combine together to form a new company altogether. An acquisition may be private or public, depending on whether the acquiree or merging company is or isn't listed in public markets. An acquisition made a company may be friendly or hostile. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition is a purchase of a smaller firm by a larger one. A reverse takeover is where a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. Reverse merger refers to a deal that enables a private company to get publicly listed in a short time period.

Questions:

•  What is a merger and acquisition?
• How does a merger and acquisition affect the companies?