Glossary
Merger and acquisition (M&A)
The combination of two companies, or one buying another, paid for in cash, shares or both.
On this page
A merger is the combination of two companies into one; an acquisition is one company buying another. In practice the terms overlap, and most deals are acquisitions in which a larger buyer absorbs a target. For shareholders, M&A is one of the biggest events a stock can go through: the target usually jumps toward the offer price, while the buyer's shares may rise or fall depending on whether the market thinks it paid too much.
How deals are paid for
- Cash: the buyer pays a fixed price per share. Target holders receive cash and usually owe tax on any gain.
- Stock: target holders receive the buyer's shares at a set exchange ratio, so the value of the deal moves with the buyer's stock price.
- Mixed: part cash, part stock.
Public deals are typically structured as a merger agreement voted on by shareholders or as a tender offer made directly to them, and larger ones need antitrust clearance from US regulators, and sometimes foreign ones, before closing.
What to watch for
Deals can fail over financing, regulation or a shareholder vote, and the target often falls back toward its pre-deal price. Buyers frequently promise cost savings, or synergies, that are hard to deliver. Large write-downs of goodwill years later are a common sign that an acquisition overpaid.