You’ve probably heard the terms merger and acquisition before. They’re terms we frequently hear in the news, like the recent announcement that 21st Century Fox and News Corp may merge into one company again. But these very different terms are often lumped together, creating confusion about what separates the two very distinct types of purchases.
What is the difference between a merger and an acquisition? We discuss essential features of each and why a company may choose one over the other.
The team at BrewerLong focuses on helping businesses and their families run their companies and protect and grow their wealth. For over a decade, we have assisted dozens of entrepreneurs at all stages of business development in Central Florida.
What Is the Difference Between a Merger and an Acquisition?
Whether you’re talking about a merger or an acquisition, you have one or more businesses buying another. The fundamental difference between a merger and an acquisition is what happens after the transaction closes.
In most cases, one business ceases to exist once an acquisition occurs. Company A buys Company B. Company B dissolves as part of the acquisition, whereas Company A lives on but with the benefit of Company B’s assets.
A merger is slightly different. Instead of Company B closing, you may have both companies close and join forces to start a single company. For example, the 1998 Exxon and Mobil merger is a famous example of two successful companies merging into one: ExxonMobil. But there are many types of mergers in terms of the mechanics and the reasons for the merger.
How Does a Merger Operate?
As we discussed, a merger’s basic framework is the combination of two businesses. Because of the cooperative nature of mergers, the term has a positive connotation and is more frequently used and preferred.
But not all mergers are the same. There are multiple ways to combine forces, each with essential features that can be why a company may choose a merger over a straight acquisition.
Let’s go over each type in turn.
Direct or Forward Merger
Direct mergers are the most straightforward type of merger. A direct merger occurs when Company A merges with Company B to form Company AB. ExxonMobil is a famous example of a direct merger.
Indirect or Forward Triangular Merger
In a forward triangular merger, you have three companies:
- The buying company (the one handing over the money);
- The target company (the one being purchased); and
- The merger vehicle (a shell or subsidiary company created to carry out the merger).
During this type of merger, the assets and liabilities of the target company are usually transferred to the merger vehicle. At the end of the merger, the target company is a wholly-owned subsidiary of the acquiring company.
Companies may elect to acquire another business indirectly to avoid the potential legal, financial, and tax consequences of directly acquiring the business. For example, because the target’s liabilities stay with it, the target, not the buying company, is responsible for paying it. For branding purposes, having both companies still exist at the end of the merger can also be beneficial.
Reverse Triangular Merger
A reverse triangular merger operates like a forward merger with one key exception: the shell company merges into the target. But the result of the merger is the same. When all is said and done, the target is a wholly-owned subsidiary of the buying company.
A company may choose this form mainly because of the legal and tax implications of the mechanics.
How Does an Acquisition Work?
An acquisition is where one company buys another company outright. There’s typically no joining of forces or the target becoming a wholly-owned subsidiary. The target usually dissolves during the course of the acquisition.
Merger vs. Acquisition: How Does a Company Choose?
Deciding whether a merger or an acquisition is more appropriate for your business is complex. It’s not a decision to be taken lightly because, as we talked about, your business may cease to exist when the transaction is done.
Among the many factors that go into choosing one transaction over another are the following:
- Brand recognition. Even if a brand isn’t successful as a business, the name recognition and public trust in the brand can be worth quite a bit. Having the name survive the transaction can be a vital asset. For example, the enormous proposed merger of Kroger and Albertsons might favor a plan in which the stores keep their names to take advantage of regional name recognition.
- Viability. Suppose there is a significant imbalance between the financial viability of one company versus another and little hope that the imbalance will lessen. In that case, a merger may not be the best option for the buying company.
But the difference between a merger and an acquisition extends beyond operational. There can be significant legal and tax implications for each.
Before deciding what course is right for your business, talk to trusted legal and financial professionals to ensure you understand each option’s pros and cons.
BrewerLong—Experienced Business Attorneys Serving Central Florida
At our firm, we focus on building a relationship with our clients so we can genuinely deliver personalized legal services to them. We understand that every business has unique goals and priorities. We seek to discover those before we give recommendations.
Our team includes lawyers who are leaders in their fields and have given lectures and written articles on essential business topics.