The basic concept behind a merger or acquisition is that two companies are greater than the sum of the two separate companies. Most mergers are made in the interest of increasing the shareholder’s profits as well as elevating higher management’s status in the business world. Many CEO’s receive large bonuses for both completing mergers and acquiring other companies. At times, small companies that cannot survive alone but could provide a needed good or service to a larger company agree to merge in order to save their business.

Synergy

Synergy is used to refer to the idea that the combination of two companies would allow for more cost efficient and profitable operation. For example, if one company has an outstanding product but no way in which to distribute, while another company has a terrible product but great distribution techniques, then potentially the two companies could create synergy with a merger.

Mergers vs. Acquisitions

These terms are commonly used interchangeably but in reality, they have slightly different meanings. An acquisition refers to the act of one company taking over another company and clearly becoming the new owner. From a legal point of view, the target company, the company that is bought, no longer exists. A merger is a joining of two companies that are usually of about the same size and agree to meld into one large company. In the case of a merger, both company’s stocks cease to be traded as the new company chooses a new name and a new stock is issued in place of the two separate company’s stock. This view of a merger is unrealistic by real world standards as it is often the case that one company is actually bought by another while the terms of the deal that is struck between the two allows for the company that is bought to publicize that a merger has occurred while the company that is doing the buying backs up this claim. This is done in order to allow the company that is bought to save face and avoid the negative connotations that go along with selling out.