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Mergers and acquisitions are a major field of corporate finance.
The difference between the two terms exists even though financial professionals use them as if they were synonymous.
A merger, also known as a merger of equals is when two companies close in size, let�s say X and Y, decide to merge and become a brand knew entity labeled company XY for example. The stocks of X and Y disappear from the market and new stock is issued for company XY.
A classic example of a merger would be Sanofi-Aventis, the pharmaceutical firm.
An acquisition occurs when company X purchases company Y with Y�s stock ceasing to exist, however, X�s stock is still on the market.
An example of acquisition is Bank of America�s purchase of Fleet Boston Financial.
The key driver behind any M&A transaction is synergy. Because of synergy, the combination of the two merging companies is thought to be greater than the sum of the two if taken independently.
Usually, synergies are classified by:
Strategic synergies: the most important are complementary products or services. For example, company X produces wine and company Y is specialized in French cheese, complementary to the wine production�etc
Geographical extension: company X is present in America and Africa and Y is present in Europe and Asia; XY will be present worldwide.
Acquisition of new technologies: when X buys Y, it can integrate Y�s unique technological system or innovation.
Economic synergies: including economies of scale, which is the increase in efficiency of production and the reduction of raw materials costs as the number of goods being produced increases.
Reduction in redundant workforce and merger of administrative departments.
M&A transactions are always financed in three different ways:
Cash, stock swap or a combination of both.
In a cash deal, target-company shareholders receive a cash payment for each share purchased by the acquiring company. In this kind of transaction shareholders must pay taxes when they receive the cash.
In a stock swap deal, there is simply an exchange of share certificates. Let�s look at an example: Suppose Company Y is purchased with stock by company X. X will issue new shares from its stock directly to company Y�s shareholders who will give up in return their shares in Y to company X. This transaction is not taxable at that moment, but when the shareholders of company Y sell their new shares on the market, they are taxed.
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