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What's the difference between a merger and an acquisition?

You often hear the terms lumped together: mergers and acquisitions.

They mean different things, however, and as a California business owner, you'll want to be familiar with each.

The goal of each, in theory, is they give the shareholders the greatest return on their investment. But they arrive there in different ways.

In an acquisition, one business gains the majority share of another business. The newly acquired company might keep its own name and operations or the company that has done the acquisition could just fold it into its operations.

Generally, the acquiring company is bigger and has a better financial position. Sometimes, an acquisition is called a takeover, but that's a far less friendly term. It implies that the stronger company has swallowed the weaker one, though that characterization isn't always true.

A merger is different.

With a merger, a new business is created when two companies decide to become one. A merger often occurs when two companies that are roughly the same size want to work together in a new company.

A merger can have a big impact on two companies that work in the same industry by reducing the duplication of efforts. The accounting, purchasing and marketing departments of each company, for example, can function as just one entity. That means there will be some elimination of positions to the benefit of the combined firm.

We often think of small firms merging and combining their business functions. Money can be saved when larger companies merge, as well.

Mergers and acquisitions definitely have their benefits, but they carry risks, too. When two companies begin discussions about either merging or one buying out the other, each should have an attorney involved to make sure the interests of both are represented. Too much is at stake not to.

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