Mergers and Acquisitions: What Is M&A

What is M&A

Mergers and acquisitions (M&A) is the umbrella term for deals in which companies combine or one company buys control of another, and these deals often move the share prices of everyone involved.

Merger vs acquisition

	Merger	Acquisition
What happens	Companies combine into a single entity	A buyer gains control of a target
Legal result	One or both original entities cease to exist; the surviving or new entity holds the assets and liabilities	The target usually keeps existing as a subsidiary
Typical payment	Shares of the combined company	Cash, buyer's shares, or a mix

In news, "merger" is often used loosely, even when one side clearly buys the other.

Formal definition and edge cases

In formal terms, an acquisition is the purchase of a controlling stake, usually most of the voting shares, or of a company's assets. A merger is a legal combination under company law in which the entities' assets and liabilities pass to a surviving or newly formed company.

Edge cases experienced readers meet:

Merger of equals: companies of similar size combine, often with a new name.
Hostile takeover: the buyer goes directly to shareholders, through a tender offer, without the target board's support.
Reverse merger (reverse takeover): a private company buys a listed shell to become listed without an IPO.
Leveraged buyout (LBO): the purchase is funded mostly with debt secured on the target.
Demerger (spin-off): the opposite of a merger. A company splits off a business into a separate listed company.
Goodwill: in the buyer's accounts, the price paid above the fair value of the target's net assets. Compare with book value.

Hypothetical example

Company A announces a cash offer for all shares of Company B. The offer price is above B's last market price. That gap is the takeover premium.

What typically follows:

B's share price jumps towards the offer price but usually stays slightly below it. The remaining gap, the "deal spread", reflects the risk that the deal fails or is delayed. Trading this gap is called merger arbitrage.
A's share price may fall if the market thinks A is overpaying or taking on too much debt.
If regulators block the deal or A walks away, B's price can drop back sharply.
When the deal completes, B's shares stop trading. See delisting.

In a share-for-share deal, B's holders receive A shares at a fixed exchange ratio, so B's price then tracks A's price.

Where you see the term

News: phrases such as "agrees to acquire", "takeover bid", "tender offer", "regulatory approval" or "deal terminated".
Company reports: goodwill, acquisition-related costs and "business combinations" notes in annual reports.
Indices: when a constituent is taken over, it leaves the index and is replaced. This can affect stock index products and free float weightings.
Trading platforms: a CFD (a contract on the price difference, not the share itself) on a target company may be adjusted or closed when the underlying share is delisted. Check the platform's corporate-action rules before holding positions through a deal.

Prices can gap around announcements. Leveraged CFD positions can lose money fast in such gaps, so read about risk management before trading around M&A news.

Frequent questions

What does M&A mean?

M&A stands for mergers and acquisitions, the deals through which companies combine or one company takes control of another.

What is the main difference between a merger and an acquisition?

In a merger, companies combine into a single legal entity. In an acquisition, a buyer takes control of a target, which often keeps existing as a subsidiary.

Why does the target's share price rise after a bid?

Buyers usually offer a premium over the market price. The price moves towards the offer but stays below it while there is a risk the deal fails.

Does an M&A announcement guarantee a price move?

No. Deals can be revised, blocked or cancelled, and prices can move against any position.