The Difference Between a Merger and an Acquisition Is That…

Companies often join forces to expand market presence, gain efficiencies, or enhance profitability. Mergers and acquisitions, while sometimes used interchangeably, have distinct meanings and implications. Understanding these differences is crucial for investors, executives, and employees, as each affects ownership, financial reporting, taxation, and overall strategy.

Ownership Structure and Control

Ownership distribution and control vary depending on whether a transaction is a merger or an acquisition. In a merger, both companies typically form a new entity with a shared governance structure. Leadership roles, voting rights, and decision-making authority are negotiated to reflect each party’s contributions. For example, when Exxon and Mobil merged in 1999, the newly formed ExxonMobil Corporation retained executives from both companies to balance leadership.

In an acquisition, one company takes over another, often leading to the target company losing its independent identity. The acquiring firm absorbs the target’s operations, which can result in management changes, restructuring, and layoffs. When Amazon acquired Whole Foods in 2017, it maintained the Whole Foods brand but took full control, introducing price reductions and integrating Prime membership benefits.

The nature of control also depends on whether the acquisition is friendly or hostile. In a friendly acquisition, the target company’s board agrees to the deal, negotiating terms beneficial to shareholders and employees. In a hostile takeover, the acquiring company bypasses management and appeals directly to shareholders, sometimes through tender offers or proxy fights. A well-known example is InBev’s 2008 hostile takeover of Anheuser-Busch, where InBev approached shareholders after the board resisted the deal.

Accounting Classification

How a merger or acquisition is recorded in financial statements depends on accounting standards. Under U.S. Generally Accepted Accounting Principles (GAAP), acquisitions use the purchase method, where the acquiring company records the target’s assets and liabilities at fair value. If the purchase price exceeds net asset value, the excess is recorded as goodwill, which must be tested for impairment annually under Accounting Standards Codification (ASC) 350. If goodwill becomes impaired—meaning its fair value falls below its carrying amount—the acquirer must recognize a loss on its income statement.

Mergers, particularly those classified as “mergers of equals,” are accounted for as business combinations under ASC 805. Even if companies present a deal as a merger, one entity must be identified as the acquirer for accounting purposes. The acquiring company consolidates financial statements, recognizing the target’s assets, liabilities, and earnings as if it had purchased them outright. This affects financial ratios such as return on assets (ROA) and debt-to-equity, influencing investor perceptions.

Stock-for-stock mergers introduce additional complexities. If shares are exchanged, the acquiring company records the transaction based on the fair value of either the shares issued or the target’s shares received, whichever is more reliably measurable. This can lead to fluctuations in reported earnings per share (EPS), especially if the acquiring company’s stock is volatile. When Disney merged with 21st Century Fox in 2019, the deal included both cash and stock, requiring Disney to adjust its financial statements to reflect the fair value of issued shares at closing.

Board and Shareholder Approval

The approval process depends on corporate governance structures, regulatory requirements, and transaction terms. Publicly traded companies must comply with securities laws, stock exchange rules, and internal bylaws governing deal authorization.

For mergers, shareholder approval is typically required for both entities, as the transaction fundamentally alters corporate structure. Under Delaware General Corporation Law (DGCL) section 251, a merger requires a majority vote from shareholders of each company unless an exception applies, such as a short-form merger where a parent company already owns at least 90% of a subsidiary. Some jurisdictions impose supermajority voting thresholds, meaning approval may require more than a simple majority, particularly if shareholder rights or ownership percentages change significantly.

Acquisitions, especially those structured as asset purchases, may not always require shareholder votes. If a company acquires another through a direct stock purchase, only the target’s shareholders need to approve the sale, assuming the acquiring firm isn’t issuing a substantial number of new shares. The New York Stock Exchange (NYSE) and Nasdaq require shareholder approval if a listed company issues stock exceeding 20% of its pre-transaction outstanding shares (NYSE Listed Company Manual section 312.03). This rule prevents excessive dilution without investor consent.

Tax Treatment

Tax implications depend on transaction structure, payment method, and jurisdiction. In the U.S., deals are categorized as taxable or tax-free reorganizations under the Internal Revenue Code (IRC). A taxable acquisition occurs when cash or property is exchanged for shares, triggering capital gains tax for selling shareholders. If the target company is a C corporation, corporate-level taxes may also apply if assets are sold instead of stock. The corporate tax rate, currently 21% under the Tax Cuts and Jobs Act (TCJA), influences whether companies opt for asset or stock sales, as asset sales can result in double taxation—once at the corporate level and again when proceeds are distributed to shareholders.

Tax-free reorganizations, governed by IRC section 368, allow shareholders to defer capital gains if they receive stock in the acquiring company instead of cash. These transactions must meet continuity of interest and business purpose requirements, meaning a significant portion of consideration—typically at least 40%—must be stock to qualify for tax deferral. The acquiring company also inherits the target’s tax attributes, such as net operating losses (NOLs), which can offset future taxable income. However, IRC section 382 limits how much NOLs can be used post-acquisition based on a formula tied to the target’s market value and the long-term tax-exempt rate, preventing excessive tax sheltering.

Potential Effect on Valuation

The impact of mergers and acquisitions on valuation depends on deal structure, financing method, and market perception. Investors assess whether a transaction creates synergies—cost savings or revenue enhancements that make the combined entity more valuable than the sum of its parts. If synergies materialize, the acquiring company’s stock price may rise, reflecting increased profitability. However, if integration challenges arise or expected benefits fail to materialize, the market may react negatively, leading to a decline in shareholder value.

Financing decisions also influence valuation. Cash acquisitions are often seen as less risky since they do not dilute existing shareholders, but they can strain liquidity and increase leverage if funded through debt. Highly leveraged deals may trigger credit rating downgrades, raising borrowing costs. In contrast, stock-based acquisitions dilute ownership but can be advantageous if the acquirer’s stock is overvalued. The 2015 merger of Heinz and Kraft, for example, was structured as a stock-and-cash deal, with projected synergies of $1.5 billion. However, post-merger struggles led to a $15.4 billion goodwill impairment charge in 2019, significantly reducing Kraft Heinz’s market capitalization.