Merger vs. Acquisition
Merger and acquisition are terms that are used interchangeably to describe two businesses that join together to create one large business that is more profitable and efficient. These words are often used as synonyms though they are slightly different. Whether a purchase will be considered as an acquisition or merger is dependent on whether it is hostile or friendly and the manner in which it is announced. This means the difference between these two lies in:
- How communication of the purchase is carried out
- The manner in which the information is received by the target of employees, shareholders and board of directors of the company.
Whenever one company takes over the operations of another and it establishes itself as the new owner clearly, the purchase is known as an acquisition. From a legal standpoint of view, the target company will cease to exist and the buyer ‘swallows’ the company and the stocks of the buyer continue to be traded.
On the other hand, a merger occurs when two firms, often of the same size make the agreement to move forward and form one company rather than remain separately operated and owned. In such instances, the agreement is known as ‘merger of equals’. The stocks of both companies are then surrendered and new company stock offered in its place.
Mergers of equals don’t happen often as in most cases, one company buys another and as part of the terms contained in the deal, the acquired firm proclaims the deal as a merger while it is an acquisition.
Control, is the key that differentiates a merger from an acquisition though there are a couple of factors that come into play as well. In cases of a merger, the liabilities, net assets and value of assets from previous entities are carried over to a new entity and no adjustments of liabilities and assets to fair value are made. Operating results of the entity that is newly formed are reflected from the transaction date forward as such, there is no activity on state of activities reported prior to the date of transaction.
The accounting treatment of an acquisition is similar to that one followed for a profit entity and requires reevaluation of liabilities and assets acquired. All identifiable assets that are acquired, non-controlling interests and liabilities assumed in the acquire are valued at fair value as of the date of acquisition.
A purchase deal can be called a merger when the CEOs of both companies agree the joining together is in the interest of both companies. However, when the deal is not friendly and the target company is not open to the purchase, then it is called an acquisition.
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