While mergers and acquisitions are often mentioned in the same breath, they are two different terms that refer to distinct business agreements. A merger results from two organizations combining to become an entirely new company, while an acquisition involves one company absorbing a smaller or newer company. Either process can be pursued to help a company eliminate competition, gain a larger share of the market, or earn a big profit.

Mergers

As previously stated, a merger involves combining two organizations to create a new company. This is usually an amicable process that consists of the management of both companies agreeing willingly. In this situation, both companies have something to gain by merging and forming a new company. Typically, the new company will have more resources, enabling them to expand into new markets worldwide. The merging of two companies requires creating an entirely new management structure, choosing a new CEO, and going public with new stock shares. In a merger, the two companies involved are usually similar in their size and reach, so this type of agreement is mutually beneficial to everyone involved.

Acquisitions

An acquisition is more commonly known as a hostile takeover as it involves a larger and established corporation buying out a smaller or newer company. This typically happens when a new startup introduces a product that could take a large portion of the market away from a larger corporation. Rather than trying to compete with the startup, the larger corporation will buy out the startup. In that case, the startup will no longer exist, and the corporation gains the rights to the products created by the startup. Often, a startup owner will accept an offer to acquire their company when the buyer is offering a substantial sum. Some entrepreneurs make a career out of creating startups that larger corporations will want to acquire. Each time they sell a company, they reinvest that money in a new startup and begin the process again.

If you’re planning to launch a startup, you may need to learn more about the specific terms involved in mergers and acquisitions. A giant corporation may be interested in buying your startup, which may interest you more than growing your own company. Your decision will depend on the goals you have for your startup, but understanding more about mergers and acquisitions will help you make an informed decision.