How do mergers differ from acquisitions in business growth strategies?

Mergers and acquisitions differ in that mergers combine two equal companies into one, while acquisitions involve one company buying another.

In a merger, two companies of roughly equal size agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a 'merger of equals'. Both companies' stocks are surrendered, and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In an acquisition, on the other hand, one company takes over another and clearly establishes itself as the new owner. The target company ceases to exist, and the buyer 'swallows' the business, with the buyer's stock continuing to be traded. In legal terms, the target company (the company that is purchased) ceases to exist, whereas the buyer 'swallows' the business and the buyer's stock continues to be traded.

In the real world, however, actual mergers of equals don't happen that often. Usually, one company will buy another and, as part of the purchase terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even though it's technically an acquisition. Being bought out often carries negative connotations, hence, it may be in the best interest of both parties to state that it is a merger, even when it's not.

The terms "merger" and "acquisition" are often used interchangeably, although in actuality, they have slightly different meanings. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company (the company that is bought) ceases to exist, the buyer 'swallows' the business and the buyer's stock continues to be traded.

In the end, the key strategic difference lies in the equality and power dynamics of the companies involved. Mergers are typically between two similar-sized companies and are more collaborative, while acquisitions involve a larger company absorbing a smaller one.