What Are Mergers and Acquisitions (M&A)? Types and Examples

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Mergers and acquisitions (M&A) is the umbrella term for transactions that combine companies, or transfer control of a company or its major assets, from one owner to another. In an acquisition, one company buys a controlling stake in another, or buys it outright, and becomes its owner. In a merger, two companies combine into a single entity, often a newly formed one, and their shareholders become owners of the combined business. The same phrase also names the advisory business: the M&A group at an investment bank is the team that advises on, structures and negotiates these deals.

What M&A Means in Finance

At its simplest, M&A answers one question: who will own and control a business after the transaction. The buying side is usually called the acquirer or bidder, and the company being bought is the target. M&A activity means the volume and value of these deals across a market or industry over a period.

Mergers vs. Acquisitions

The two words are used interchangeably in everyday speech, but they describe different outcomes.

In a merger, two companies, frequently of similar size, agree to combine and continue as one. When the partners are close in size, the deal is called a merger of equals. In the 1998 combination of Daimler-Benz and Chrysler, shareholders of both companies surrendered their shares and received stock in a new company, DaimlerChrysler.

In an acquisition, the buyer absorbs the target. The target’s shareholders are bought out, usually for cash, the buyer’s stock or both, and they do not necessarily end up as owners of the combined company.

The label is not a strict legal test. “Merger” signals partnership while “acquisition” signals that one side is in charge, so a purchase may be announced as a merger when both chief executives agree that combining benefits both companies. How the deal is presented to the target’s board, employees and shareholders, and whether it is friendly or hostile, often decides the word. Many deals contain elements of both.

In a true merger, who is the buyer? Legally, there is often no single buyer: both sets of shareholders exchange their shares for stock in the surviving or new entity. In practice, one side’s shareholders usually end up with the larger stake, its executives take more top jobs, or its name survives, and analysts treat it as the economic acquirer. Accounting rules also generally require one party to be identified as the acquirer.

Types of M&A Transactions

Mergers

The boards of both companies approve the combination and then ask shareholders to vote on it, usually aiming to combine strengths and gain market share. In 2024, HBC, the parent of Saks Fifth Avenue, announced it would acquire Neiman Marcus Group and combine the brands under a new company, Saks Global, to compete better against large online retailers. The deal was structured as an acquisition and described as a merger of brands.

Acquisitions

In a straightforward acquisition, the buyer takes a majority stake, and the target keeps operating under its own name and structure. Acquisitions are a common route into a new market, because the buyer gains existing customers, staff and operations. Amazon’s 2017 purchase of Whole Foods gave Amazon a physical grocery network, while Whole Foods, which had been losing ground to cheaper grocers, gained Amazon’s customers and logistics.

Consolidations

A consolidation combines two or more companies into a larger whole, often to increase market share and remove competitors. In the narrow legal sense, it creates a brand-new company and both originals cease to exist. In the broader business sense, it describes a company or industry rolling up rivals. Facebook’s $1 billion purchase of Instagram in 2012 is often cited in this second sense: Instagram could have competed with Facebook, and it continued as a separate app under the parent company, now Meta Platforms.

Tender offers

In a tender offer, the bidder offers to buy shares directly from the target’s shareholders at a stated price, usually above market, for a limited time. Many tender offers are agreed with the board in advance. In the US, they are regulated under the Williams Act of 1968 and SEC rules on disclosure, how long the offer stays open and how shareholders are treated. In 2008, Johnson & Johnson made a tender offer for Omrix Biopharmaceuticals at $25 per share, about $438 million in total; Omrix agreed and the deal closed that year.

Acquisition of assets

Instead of buying the company, the buyer can buy its assets: factories, product lines, patents, customer contracts or brands. The seller typically needs shareholder approval to sell all or substantially all of its assets. Asset purchases are common in bankruptcy, where bidders buy pieces of the failed company and the remaining shell is liquidated. The main attraction is selectivity: the buyer can generally take the assets it wants and leave many liabilities with the seller.

Management buyouts

In a management buyout (MBO), a company’s own executives buy a controlling stake in the business they run, often taking it private. They usually partner with private equity firms or other financiers, fund the deal heavily with debt and need shareholder approval. In a related leveraged buyout (LBO), an outside buyer, typically a private equity firm, funds most of the price with borrowed money secured on the target’s assets and cash flows. Elon Musk’s 2022 $44 billion purchase of Twitter was a leveraged take-private by an outside buyer, with about $25.5 billion funded with margin loans and other debt, rather than an MBO.

Reverse mergers

In a reverse merger, a private company acquires a publicly listed shell company, one with few assets and no real operations, and merges into it, so the combined company is public without a traditional initial public offering. The appeal is speed; the trade-off is avoiding the scrutiny an IPO process brings.

How Mergers Are Classified by Business Relationship

Deals are also described by how the two businesses relate to each other:

• Horizontal merger: direct competitors with the same products and markets combine.
• Vertical merger: a company combines with a supplier or a distributor in its own supply chain, such as an ice cream maker buying its cone supplier.
• Congeneric merger: two businesses that serve the same customers in different ways combine, such as a TV manufacturer and a cable company.
• Market-extension merger: companies selling the same products in different geographic or customer markets combine.
• Product-extension merger: companies selling different but related products in the same market combine.
• Conglomerate merger: companies with no overlapping business combine.

Horizontal vs. vertical acquisitions

Horizontal integration means buying a business at the same stage of the value chain, as in Marriott International’s 2016 acquisition of rival hotel operator Starwood Hotels & Resorts. Vertical integration means taking control of another stage in producing or distributing your own products: Apple’s 2012 acquisition of AuthenTec brought in-house the fingerprint sensor technology later used in Touch ID on iPhones.

The distinction matters beyond strategy. Horizontal deals reduce the number of competitors in a market directly, so they tend to draw the most attention from competition regulators. Vertical deals raise a different concern: that the combined company could cut rivals off from a supplier or a distribution channel.

Purchase and consolidation structures

Mergers can also be described by how ownership changes hands. In a purchase merger, one company buys the other with cash or debt such as bonds. The sale is taxable to the selling shareholders, and depending on structure, the buyer may record the acquired assets at the purchase price and depreciate or amortize the higher amount, reducing later taxable income. In a consolidation merger, a new company is formed to combine both originals. Tax and accounting treatment depends on the deal structure and jurisdiction.

How M&A Deals Are Financed

A buyer can pay with cash, with its own stock, by assuming the target’s debt, or with a combination. Each choice shifts risk differently:

• Cash gives target shareholders a fixed amount and ends their exposure. The buyer bears all the risk that the deal underperforms and, if the cash is borrowed, interest costs and leverage.
• Stock makes target shareholders part-owners of the combined company, sharing its gains and losses. The buyer avoids new debt but issues new shares, diluting existing owners.
• Assumed debt reduces the cash or stock handed over, but the debt still has to be serviced, which is why buyers compare offers on enterprise value rather than equity price alone.

Sometimes the investment bank advising the seller arranges a ready-made financing package for bidders, called staple financing. It lets more buyers bid quickly and with confidence that funding is available.

In smaller deals, a buyer may purchase all of a company’s assets for cash. The seller is left holding cash and any debt it kept, and can pay out to its shareholders and liquidate or use the money to enter a different business.

How M&A Deals Are Valued

The seller wants the highest price and the buyer the lowest. Both anchor on standard valuation methods and comparable companies, and analysts often present the results side by side as a range of values for the target.

Price-to-earnings ratio (P/E)

The P/E ratios of comparable public companies in the same industry indicate what multiple of the target’s earnings is reasonable to offer. P/E is simple but reflects only equity and accounting profit, so it can mislead when companies carry very different debt loads.

Enterprise value to sales (EV/sales)

The buyer offers a multiple of the target’s revenue, informed by the price-to-sales and EV/sales ratios of industry peers. Enterprise value adds debt and subtracts cash from market capitalization, so it reflects the cost of the whole business, not just its shares. Revenue multiples are useful for targets that are growing but not yet consistently profitable.

Discounted cash flow (DCF)

A discounted cash flow analysis values the target as the present value of the free cash flow it is expected to generate. Free cash flow is commonly estimated as:

Free cash flow = net income + depreciation and amortization − capital expenditures − increase in working capital

Those forecast cash flows, plus a terminal value for the years beyond the forecast, are discounted back at the company’s weighted average cost of capital (WACC). DCF is the most theoretically complete method, but it is highly sensitive to the growth, margin and discount rate assumptions fed into it, so small changes can move the answer a long way.

Replacement cost

Occasionally a target is valued at what it would cost to build an equivalent business from scratch: the buyer argues it will either pay that amount or build a competitor for the same money. In practice, assembling management, property and equipment takes time, which itself has value. The method fits asset-heavy businesses far better than service or technology companies, whose key assets are people, relationships and ideas.

Worked Example: Paying for a Deal With Stock vs. Cash

Assumptions (hypothetical figures): Acquirer A has 100 million shares at $50, a market value of $5 billion, and earns $400 million a year, so earnings per share (EPS) are $4.00 and its P/E is 12.5. Target B has 40 million shares at $20, a market value of $800 million, and earns $60 million a year. A offers a 30% premium: $26 per share, or $1.04 billion in total. Synergies, fees and integration costs are ignored at first.

All-stock deal. The exchange ratio is $26 ÷ $50 = 0.52 A shares for each B share. A issues 40 million × 0.52 = 20.8 million new shares, for 120.8 million in total. Combined earnings are $460 million, so EPS becomes $460 million ÷ 120.8 million ≈ $3.81, down from $4.00. The deal is dilutive by about 4.8%. Former B shareholders own 20.8 ÷ 120.8 ≈ 17.2% of the combined company. To bring EPS back to $4.00, the combined company would need $483.2 million of earnings, meaning about $23.2 million a year of after-tax synergies.

The reason it is dilutive: A is paying $1.04 billion for $60 million of earnings, a P/E of about 17.3, using its own shares valued at a P/E of 12.5. Under these simplified assumptions, an all-stock deal reduces EPS whenever the P/E paid for the target exceeds the acquirer’s own P/E.

All-cash deal funded with debt. Suppose A borrows the full $1.04 billion at a hypothetical 6% interest rate with a 25% tax rate. Annual interest is $62.4 million, or $46.8 million after tax. Combined earnings fall to $460 million − $46.8 million = $413.2 million, but the share count stays at 100 million, so EPS rises to about $4.13. The deal is accretive on paper, but A now carries $1.04 billion of new debt and its shareholders absorb all of the risk if B underperforms.

Accretion and dilution measure only the near-term effect on EPS. A deal can raise EPS and still destroy value if the buyer overpays relative to the cash flows it acquires, which is why buyers also test the price against DCF, net present value and expected return.

Why Companies Pursue Mergers and Acquisitions

Competition and growth drive most deals; buying a rival removes a threat while adding its revenue. The main motives are:

• Synergies: cost savings from eliminating duplicate functions, combining purchasing or sharing facilities, and revenue gains from cross-selling to each other’s customers.
• Growth and market share: buying an established business is often faster than building one.
• New products, technology and talent: acquiring intellectual property, engineering teams or product lines.
• Market entry: reaching new regions or customer groups through an existing local business.
• Supply chain control: securing key inputs or distribution through vertical deals.
• Competitive position: buying a fast-growing rival before it becomes a serious threat, sometimes described as widening the buyer’s moat.

Friendly vs. Hostile Takeovers

In a friendly acquisition, the target’s board approves the deal and recommends it to shareholders. In a hostile takeover, the board does not consent, and the bidder goes directly to shareholders with a tender offer at a premium or a proxy fight to replace board members with directors who will accept the deal, aiming to control enough shares to force the transaction through.

Targets resist with defenses such as a shareholder rights plan (poison pill), which lets existing shareholders buy additional shares at a discount if a bidder crosses an ownership threshold, making the takeover far more expensive. A target may also look for a preferred buyer, sometimes called a white knight, to make a competing offer.

Impact on Shareholders

Around the announcement, the target’s share price typically rises toward the offer price. The acquirer’s often falls, reflecting the premium, the cash or shares it gives up and doubt about whether synergies will materialize. If the target trades below the offer price afterward, the gap reflects the market’s view of the risk that the deal fails to close and the time until it does.

Over the longer term, the outcome depends on whether the gains from combining justify the price paid; merged companies do not reliably outperform.

Stock-for-stock deals also change voting power, since every existing holder owns a smaller slice of a larger company. Acquirer shareholders usually lose little when the target is much smaller; in the worked example above, A’s original owners keep about 82.8%. Shareholders of a small target end up with a small fraction of the combined voting pool.

Limitations and Risks of M&A

• Overpaying. Competitive bidding and optimistic synergy forecasts can push the premium above what the combined business can earn back.
• Integration risk. Combining systems, cultures, pay structures and management teams is slow and expensive, and key employees or customers may leave.
• Deals that never close. Announced deals can collapse because of financing problems, shareholder votes, competing bids or regulators.
• Regulatory review. In the US, the Hart-Scott-Rodino Act of 1976 requires deals above set size thresholds to be reported to the Federal Trade Commission and the Department of Justice and to wait before closing, and regulators can sue to block deals that would reduce competition. Other jurisdictions run their own merger control regimes.
• Leverage. Debt-funded deals, especially LBOs, leave large fixed interest payments that become a burden if earnings fall.

Terms Often Confused With M&A

• Merger vs. consolidation: strictly, a merger has one surviving company, while a consolidation creates a new one; business writing often uses “merger” for both.
• Acquisition vs. takeover: “takeover” usually means an acquisition, especially a hostile one; a friendly acquisition is rarely called a takeover.
• M&A vs. divestiture: a divestiture is the seller’s side of an asset or business-unit sale. One company’s divestiture is another’s acquisition.
• M&A vs. joint venture: in a joint venture, two companies create a separate business that they own together, but neither gains control of the other.
• Tender offer vs. merger vote: a tender offer goes to shareholders individually, who decide whether to sell; a merger is approved by a shareholder vote that, once passed, binds all shareholders, subject to legal rights such as appraisal.

FAQs

The Bottom Line

M&A matters to shareholders of both buyers and targets, since deal terms decide who owns and controls the combined business. Targets usually gain a premium at announcement, while acquirers carry the risk of overpaying, integration problems and debt. Accretion on paper does not guarantee value, so buyers also test the price against discounted cash flow, net present value and expected return.