In the business world, the terms ‘merger,’ ‘acquisition,’ and ‘takeover’ get thrown around, sometimes used interchangeably. However, there are key differences between mergers, acquisitions, and takeovers. Each of these game-changing transactions comes with its own set of legal and financial considerations and is received differently by the parties involved and the public. 

Let’s sort out the differences between a merger, acquisition, and takeover. Before we get down to the definitions, let’s explore why the differences between these terms are worth knowing.

Mergers, Acquisitions, and Takeovers – Why is it Important to Know the Difference?

As the old adage goes, knowledge is power. The more informed you are about mergers, acquisitions, and takeovers, the more prepared you’ll be to navigate future deals and operate successfully in the corporate climate. 

Knowing the difference between mergers, acquisitions, and takeovers can affect…

  • Your understanding of publicized instances of these transactions. – News outlets often heavily report major mergers, acquisitions, and takeovers. Having these terms clearly in mind can give you an informed outlook on current business world events.
  • Your business strategy. – If you intend to participate in a merger, acquisition, or takeover in the future, knowledge of these terms will equip you to know what kind of deal you’re looking for and lead to better decision-making. 
  • Your reputation. – You can promote smooth business relationships and build your reputation as a knowledgeable asset to your company when you are well-acquainted with the nuances of these related yet unique business situations. 

While mergers, acquisitions, and takeovers are not entirely dissimilar, each term describes a different transaction. Let’s define each term.

Defining the Terms: What is a Merger, Acquisition, and Takeover?

Explaining the difference between mergers, acquisitions, and takeovers can be tricky since these business situations have overlapping features and shared characteristics. In fact, mergers and acquisitions are so closely related they are almost always paired in business lingo and simply referred to as M&A. 

Still, there are critical differences between mergers, acquisitions, and takeovers. What does each term mean?

What is a Corporate Merger?

A merger is when two or more companies combine forces and emerge as a new entity that assumes legal and financial responsibility moving forward. 

“A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, and scale of operations,” says Investopedia. “Mergers are most commonly done to gain market share, reduce operational costs, expand to new territories, unite common products, grow revenues, and increase profits—all of which should benefit the firms’ shareholders.”

To sum it up, mergers are voluntary and mutually beneficial unions between relatively equal parties aimed at increasing market share, combining forces to take operations to the next level. 

However, these friendly deals are less common than their sometimes hostile counterparts – acquisitions and takeovers.

What is a Corporate Acquisition?

An acquisition is when one company purchases another, yet both companies continue to exist and operate as separate entities. 

“Acquisitions are typically made in order to take control of, and build on, the target company’s strengths and capture synergies,” says the Corporate Finance Institute. “An acquisition is a great way for a company to achieve rapid growth over a short period of time.” 

Ensuring a good match before acquiring another company is key since a poorly made acquisition can result in internal strife and external criticism. However, a strategic match can result in significant advantages, such as market expansion and access to augmented resources.

What is a Corporate Takeover?

A takeover – as you may guess from the name – is when one company takes over another, sometimes struggling, company. A corporate takeover may be friendly if the current management sees the benefit and welcomes the intervention. Other takeovers are hostile and unwelcome by the target company. 

“A corporate takeover occurs when the controlling interest in a corporation shifts from one party to another,” says the Legal Information Institute of Cornell Law School. “Takeovers occur for a collection of reasons though the primary ones include industry diversification, corporate raider attempts, and removal of competition.” 

In any case, takeovers are often subject to strict regulation and can be messy and time-consuming. However, the potential financial benefits may motivate a company to take over another.

Differences Between Merger, Acquisition, and Takeover

Given the above definitions, let’s highlight the differences between mergers, acquisitions, and takeovers.

“Mergers combine two separate businesses into a single new legal entity. True mergers are uncommon because it’s rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs,” explains the U.S. Small Business Administration.  “Unlike mergers, acquisitions do not result in the formation of a new company. Instead, the purchased company gets fully absorbed by the acquiring company.”

Meanwhile, takeovers involve one company gaining legal control over another, often circumventing the wishes of the target company’s management and negotiating directly with shareholders.

“Takeovers are a form of acquisition but often imply a hostile or unsolicited acquisition bid,” says TimesPro, an award-winning India-based online education platform. “The acquiring company bypasses the target’s management and shareholders by making a direct offer to the shareholders or through other means, such as a tender offer or a proxy fight.”  

Here’s a breakdown of the three key factors that differentiate mergers, acquisitions, and takeovers:

  1. The reception – Each transaction is met with a different reaction from both sides involved – ranging from mutually cordial to hostile. Mergers and acquisitions are typically more friendly than takeovers. However, each situation is unique depending on the approach taken, the management involved, and many other factors governing the reception of the deal on either side.  
  2. The motivation – Motivations can range on all sides of any of these transactions, from gaining market share, discovering new synergies, and unlocking more capital to eliminating competition or making some sort of ethical statement. Mergers are typically two team players coming together to combine their market share. Acquisitions have a clear leader among two distinct entities, with the acquirer assuming responsibility for discovering synergies and guiding ensuing operations. Takeovers are the most polarizing of these three transactions, with potentially more competitive motivations. 
  3. The legalities – Navigating the legal fallout of a hostile takeover is typically more demanding and subject to greater regulation than handling a mutually beneficial merger.  

Now, let’s look beyond the differences and find a handful of commonalities between mergers, acquisitions, and takeovers.

Similarities Between Merger, Acquisition, and Takeover

Mergers, acquisitions, and takeovers all require an immense amount of strategization, organization, and communication. These complex transactions can take months or even years to realize and demand great attention to detail to mitigate risks and ensure profitability. 

Here are five points of similarity between mergers, acquisitions, and takeovers: 

  1. The need for data security. – During these transactions, sensitive company, employee, and customer data must be protected. Both parties should keep in mind that sharing this data may be subject to legal regulation. Remember, data leaks can be costly and cut into the profits of an otherwise profitable deal.  
  2. The need for due diligence. – Parties to an M&A or takeover should conduct thorough due diligence on each other to uncover any potential red flags or dealbreakers. An acquiring company may be liable for the inherited company’s regulatory oversights. 
  3. The need for legal counsel. – All parties to a deal should employ expert legal counsel to navigate these complicated deals and ensure everything is handled according to the latest regulations. 
  4. The need for effective communication. – “Communication is even more important when there’s instability. Managers often communicate less in troubled times — when they should be communicating more. And sometimes, people under-communicate because they are not sure what they can share. Usually, a little more transparency is helpful,” advises The Washington Post. “Done right, you will notice employees are more receptive to change, more likely to participate, and more willing to give their best each day.” 
  5. The need for next-level tech. – All sides to a transaction should invest in tech tools to promote organization, communication, and informed decision-making. Prioritize tools that address the above needs, including data security, due diligence, and collaboration with legal counsel. 

Where can you connect with the right tech tools to facilitate your next merger, acquisition, or takeover

Recommended reading: The Merger and Acquisition Process: From Start to Finish

VDR Software for Facilitating Mergers, Acquisitions, and Takeovers

CapLinked offers next-level virtual data room (VDR) tech tools to help businesses navigate the complexities of mergers, acquisitions, and takeovers. Our user-friendly boutique-level digital data rooms give all parties a secure platform for storing and organizing the mountains of paperwork needed to facilitate an M&A or takeover and the tools required to enable clear and effective communication. 

Using our VDR software can help the M&A process go as smoothly as possible, promoting transparency, compliance, and data security. Our robust tech tools can help you prioritize due diligence to highlight potential deal breakers and mitigate legal and financial risks. These tools also pave the way for a smoother post-M&A transition phase, uniting and stabilizing all teams through transparency, accountability, and collaboration. 

Start your free trial today to see how our VDR technology can elevate your M&A processes and promote better outcomes.