Merger or Acquisition — What's the Difference?

Merger and acquisition are the two fundamental ways business transactions (M&A) can be structured. They resemble each other in purpose — bringing two businesses closer together — but differ in structure, ownership, and often in tax treatment too.

Short answer: In an acquisition, one party buys the other business (or part of it), and the seller typically exits wholly or partly as owner in exchange for payment. In a merger, two businesses combine into one legal entity, and the owners of both original companies end up as co-owners of the merged business.

Ownership after the transaction

In an acquisition, the seller typically receives a cash (or partly cash) payment and leaves the ownership. In a merger, the owners instead exchange their stakes in the original companies for stakes in the new, combined company — shares are exchanged instead of (only) cash.

Structure

An acquisition can be completed as an asset purchase (buyer takes over selected assets and agreements) or a share purchase (buyer takes over the entire legal company, including all obligations). See acquiring a business: asset purchase or share purchase. A merger, on the other hand, is a corporate law process, where one company is either absorbed into another (merger by absorption) or two companies are jointly incorporated into an entirely new company (merger by formation of a new company).

Tax

Under certain conditions, mergers can be completed tax-free under the rules of the Merger Tax Act, where taxation is deferred instead of triggered by the transaction itself. In an ordinary acquisition, by contrast, taxation is typically triggered for the seller at the time of sale. The tax consequences always depend on the specific situation — seek advice before choosing a structure. See also the significance of company structure when selling.

When does one choose which?

An acquisition is by far the most common solution when an owner wants to exit entirely and receive a cash sale amount. A merger is more relevant when two businesses want to continue together under shared ownership — e.g. two competitors seeing an advantage in joining forces, without either of the original owners necessarily wanting to sell out entirely. See mergers of businesses: when is it an alternative to a sale?