Mergers and acquisitions (M&A) are very common today: One business—usually a corporation—takes over or buys out another business and takes its place in the market. Although the terms are often used interchangeably, a merger is not the same as an acquisition.
In this article, we explain the difference between mergers and acquisitions, describe the four main types of mergers and acquisitions, and break down the rights and liabilities of the corporations and their shareholders after a merger or acquisition.
What Are Mergers and Acquisitions?
So what’s a merger and what’s an acquisition, and how can we tell the difference?
What’s a Merger?
A merger is when two or more companies—typically of the same size—combine or consolidate to become one new business. The old businesses die or cease to exist and the newly created business is called the “survivor.”
Because the old businesses’ shareholders now hold stock in extinct companies, new shares need to be issued by the surviving company to reflect the shareholders’ ownership in the merged company. So, after the merger, the survivor will issue new shares to shareholders of the now-extinct companies that were merged.
For example, suppose Nick owned stock in Company A and Destiny owned stock in Company B. Later, Company A and Company B merged to become Company C. Company C will issue new shares for Nick and Destiny so that they now hold stock in Company C.
What’s an Acquisition?
An acquisition is when one company—typically the larger one—buys another company's stock or assets. The acquiring company is called the “successor” and the acquired company the “target.” The successor will usually buy all or a majority of the smaller company’s shares or assets. If the successor buys more than half of the target’s shares, it’ll have control.
For instance, if Company X buys 60% of Company Y’s stock, Company X will now have majority ownership and control over Company Y.
What’s the Difference Between a Merger and an Acquisition?
In a merger, only one company exists at the end of the day. In an acquisition, both companies might still exist, but one will now have some sort of ownership over the other.
Acquisitions can happen in one of two ways: an asset purchase or a stock purchase.
In an asset purchase, the successor will choose certain assets to purchase from the target.
In a stock purchase, the successor purchases a percentage of the target’s stock, thereby coming to own the corresponding amount of the target’s assets and liabilities. For example, if a successor purchases 90% of a target’s stock, it’ll own 90% of the target’s assets and liabilities.
But the common outcome in both a merger and an acquisition is that two or more companies usually become controlled by one.
Types of Mergers and Acquisitions
Businesses combine for various reasons, and the type of merger or acquisition affects the market in different ways. Let’s go through the four most common types of mergers and acquisitions.
Horizontal Merger and Acquisition
A horizontal merger or acquisition is when two or more companies in the same market offering the same products or services are combined into one large company. The companies are typically in competition with one another. In an acquisition, one larger company takes over its competitor. In a merger, two competitors combine forces.
For example, Meta—formerly Facebook—bought Instagram for $1 billion. The acquisition saw the two former competitors, who both offered the same social media sharing services on public platforms, combine forces under a single owner, Meta.
A company might want to acquire another in a horizontal acquisition to eliminate competition. Alternatively, two competing companies might want to merge to have more control over the market and prices.
Vertical Merger and Acquisition
A vertical merger or acquisition is when two or more companies in different markets operating at different supply chains combine into one company or one common ownership. In a vertical merger or acquisition, one company gains the ability to control multiple stages of production to standardize quality and reduce production costs.
For instance, AT&T, a telecommunications company, bought Time Warner, a television content provider. As a distributor, AT&T gained access to the various content streams Time Warner provides, such as HBO and Warner Brothers. With its acquisition, AT&T now controls both the content and the distribution of the content.
Businesses favor vertical mergers and acquisitions because controlling different stages of production increases efficiency and reduces costs.
Conglomerate Merger and Acquisition
A conglomerate merger or acquisition is when two or more companies in completely different markets offering completely different products or services combine. In a merger, the companies become a single mega company. In an acquisition, the smaller companies continue to exist under the ownership of the purchasing company.
For example, Nestle has acquired multiple companies in various industries to grow its portfolio, including:
- Gerber, providing baby food
- Deer Park Spring Water, providing bottled water
- Nespresso, providing coffee
- Stouffer’s, providing frozen food
- Prometheus Laboratories, providing health diagnostics and pharmaceuticals, and
- Aimmune Therapeutics, providing treatments for food allergies.
Conglomerate mergers and acquisitions allow companies to diversify their investments in an unpredictable or cyclical market.
Concentric or Congeneric Merger and Acquisition
A concentric or congeneric merger or acquisition is when two or more companies in the same general market who offer different products or services combine. The products or services provided by the two companies are often complementary or share the same customer base or marketing channels. Again, in a merger, the companies consolidate into one company. In an acquisition, one company purchases another to expand its market reach.
The merger of Citicorp and Travelers Group is perhaps the most famous example. Citicorp provided banking and credit card services. Travelers offered insurance and investment services. While both companies were broadly in the banking and financial industry, they provided different areas of service. With their merger, they became Citigroup, and customers could now get their credit card and insurance from this one provider.
With a concentric merger or acquisition, customers get to shop for different goods and services at a single provider. This convenience translates into profits for the survivor or successor company.
Rights and Liabilities After an Acquisition
In an acquisition, the successor company purchases the target company’s assets or stock. Whether the buyer takes on the rights and liabilities of the seller depends on the type of acquisition (or “purchase”).
What Happens to Liabilities in an Asset Purchase?
Generally, in an asset purchase, the successor isn’t liable for the target's debts and liabilities. Instead, the buyer purchases the assets it wants and declines the liabilities. (These terms are ordinarily written out in an asset purchase agreement.)
But there are situations where the successor does take on the target’s debts and responsibilities, either voluntarily or involuntarily. Common situations of taking on debt include:
- Inclusion in the asset purchase agreement. The successor takes on the target’s liabilities if the successor agrees to do so in the asset purchase agreement. The successor could agree to this arrangement if the target makes it a requirement of the sale or if it earns the successor more favorable terms elsewhere, such as a lower sales price.
- De facto merger. Sometimes a sale is in reality a merger of two businesses, known as a "de facto" merger. In this situation, two companies in fact combine but don't follow the state laws on mergers, such as getting shareholder approval. Because the surviving company in a merger does take on the merging companies’ liabilities, courts have decided that an acquisition that acts like a merger should follow the same rule.
- Fraudulent sale. When the target company offloads its assets at a low price to avoid having funds left over to pay off its creditors, the survivor will be forced to pay off the target’s debts. Typically, creditors will need to get the courts to determine that the sale was fraudulent.
- Bulk sales law. If an acquisition involves a “bulk sales” transaction and the successor doesn’t notify the target’s creditors, the successor becomes responsible for the target’s liabilities to the creditors. But the bulk sales law only applies to certain sellers, and only some states have chosen to use it. (If you’re wondering whether this situation applies to you, talk with a lawyer or research your state’s version of the Uniform Commercial Code (UCC).)
What Are the Shareholder’s Rights in an Asset Purchase?
Shareholders have certain rights in an asset purchase. Both the successor and target companies’ governing documents usually determine whether an asset purchase requires shareholder approval. (A corporation’s governing documents are its articles of incorporation and bylaws; an LLC’s governing documents are its articles of organization and operating agreement.)
For the successor, shareholder approval isn’t usually required, either by its governing documents or by law. Instead, a purchase can normally be approved by a vote of the directors.
For the target, shareholder approval is typically required. But approval might be conditional upon the kind of sale. For instance, all shareholders might have to approve a sale of all of the assets while a majority of shareholders might have to approve a sale of more than half but not all the assets.
If state law lets them, any shareholders who don’t approve of the sale can demand their appraisal rights. Appraisal rights provide for a dissenting shareholder’s stock to be assessed by an outside party (sometimes a court). After a fair market price is determined, the successor will compensate the shareholder for their stock. Once compensated, the shareholder no longer has any interest in the acquisition and can move on.
What Happens to Liabilities in a Stock Purchase?
In a stock purchase, the successor usually buys most or all of the shares from the target’s shareholders. Rather than picking and choosing certain assets to buy, the successor takes on all of the target’s responsibilities—the good and the bad. The successor will take responsibility for the target’s liabilities, including debts and lawsuits, along with its assets.
Ideally, the target will communicate (or “disclose”) all of its liabilities to the buyer before the sale is finalized. Liabilities are usually listed out in a stock sale agreement. However, sometimes the target fails to communicate some of its liabilities, either on purpose or because the target is also unaware of some debt or obligation.
For instance, a known liability might be an equipment lease or property loan. An unknown liability might be an unpaid bill that has slipped through the cracks or a lawsuit that will be filed after the stock sale is finalized that is the result of the target’s bad business practices years prior.
If the target company purposefully doesn’t disclose a liability and that liability is significant and violates the initial stock purchase agreement, the company has materially breached the contract. In that situation, the successor could be entitled to damages (financial compensation). In some cases, the sale could even be invalidated.
What Are the Shareholder’s Rights in a Stock Purchase?
A stock purchase generally requires shareholder approval. State law, the company’s governing documents, and the shareholders’ agreement lay out the conditions of the approval.
For example, Massachusetts requires that a share exchange be approved by two-thirds of voting shareholders unless the corporation’s articles of incorporation or bylaws require a different vote. (Mass. Gen. Laws ch. 156D, § 11.04 (2022).)
In a full buyout, once a stock purchase is approved, all stockholders—regardless of whether they voted to approve the acquisition—will be forced to sell their shares to the successor. The stockholder is entitled to a fair market price for the shares, which can be determined by a court or independent third party.
Rights and Liabilities After a Merger
In a merger, because the surviving, merged corporation is essentially a continuation of the merging companies, it will take on all assets and liabilities of the merging companies. The survivor company owns the merging companies’ debts and obligations, including any lawsuits filed by or against the merging companies.
Of course, the survivor gains the merging companies’ stock too. As with a stock purchase, a merger requires stockholder approval. Stockholders who don’t approve of the merger can have their stock appraised by an independent party (again, sometimes a court) according to their state’s laws on appraisal rights. The dissenting stockholder will then be required to sell their shares back to the merging company.
Again, the rights of shareholders are controlled by state law, governing documents, and shareholder agreements.
Further Legal Guidance
You can do your own research or reach out to an attorney for help to fully understand your rights in a merger or acquisition in your state. If you need specific guidance regarding your rights as a shareholder, consider reaching out to a business attorney with M&A experience.