What is an M&A (Merger and Acquisition)?
Written by True Tamplin, BSc, CEPF®
Updated on June 21, 2021
Merger and Acquisition (M&A) Definition
A merger or acquisition is a process by which two companies become consolidated into a single entity.
A merger or acquisition may be done to increase a company’s reach or to gain a larger market share.
Some acquisitions may also be done to acquire another company’s supplier to reduce production costs.
Companies may also acquire companies in other markets to diversify their business.
Defining M&A in Simple Terms
In a merger, two companies, usually of about equal size, agree to join together to become a new company.
The stock of both companies is surrendered and they instead trade shares of the new joint company.
For a merger to take place, the board of directors of both companies must agree to the action.
How a Merger & Acquisition Takes Place
In an acquisition, a larger company takes over another smaller company.
The stocks of the acquired company cease to be traded, while shares of the larger company continue to trade.
This may be a “friendly”acquisition, where the two companies agree on a price for which the smaller company is purchased.
An acquisition may also be “hostile,”also known as a hostile takeover, in which the smaller company is acquired without the approval of the board of directors.
This may be done by buying a majority share of the smaller company’s stocks, for instance.