Mergers and acquisitions are often used as if they mean the exact same thing. In reality however, they are quite different and have very different implications. The biggest difference between the two, according to expert Larry Polhill, is how they are financed.

Larry Polhill on Financing Mergers and Acquisitions

Both mergers and acquisitions mean that more than one company purchases all of another company or part thereof. In a merger, to usually similar businesses agree to become a single company. This is also known as a merger of equals. Usually, a stock swap is used to finance this. This means that stock owners from both companies are provided with an equivalent amount of stock in the new business. All old stocks are surrendered and new stock is provided as a replacement. Then, a singular administrative section is set up in which the new union is managed.

Now when a business completely takes over another business, the buyer becomes the sole proprietor. This is what happens in an acquisition. Legally speaking, the company that was bought will no longer exist. Instead, it is swallowed up by the purchasing company whose stock also continues to be available. In an acquisition, two unequal businesses become one and this is usually financed through a combination of cash and debt, stocks, all cash, or additional equity.

When the CEO of both of the companies agree that it is in the best interest of both for them to come together, the deal is classed as a merger. If the takeover company wasn’t looking to be purchased, then there is a takeover. Takeover is an acquisition. If you have ever heard of hostile takeovers, which means that the company that was bought was actually resistant to this purchase, you will have watched an acquisition take place.

The success of both mergers and acquisitions very tremendously and are often difficult to predict. The way the move Is announced and whether it was a hostile or friendly are of key importance. This is also where mergers and acquisitions differ, as a merger is usually done through communication with employees, shareholders, and boards; whereas an acquisition is done behind the scenes.

There are also numerous strategies used within the field of mergers and acquisitions. All businesses, if they are to survive and thrive, must grow both horizontally and vertically. Organic growth means that they continue to trade as they were and simply grow because of increase in demand. This is limited, which is why businesses will always eventually look at mergers and acquisitions in order to deliver more services at a lower cost to more people.In a merger, two companies that offer very similar or complementary things will start to work together. In an acquisition, one company that uses a supplier will take over that supplier so that they can deliver their products or services at a lower cost. A merger is horizontal growth and an acquisition is vertical growth.