• Achille Ekeu, MBA, CVA

Defining Merger, Acquisition, Consolidation, and Divestiture


The distinction between a merger, an acquisition, a divestiture, and other types of restructurings warrants some clarification. Transactions can come in a multitude of forms, can be a hybrid of several classifications, or in new markets can create a brand new classification all together. Often some of the definitions are used interchangeably or are categorized differently.


There has really been no set standard for these definitions, but we will attempt to simplify and clarify ahead. It is important to understand these core structures to better classify any individual transaction explored.


Merger: A merger is fundamentally the combination of two or more business entities in which only one entity remains. The firms are typically similar in size. (Company A + Company B = Company A).


Consolidation: A consolidation is a combination of more than one business entity; however, an entirely new entity is created. (Company A + Company B = Company C).


Acquisition: An acquisition is the purchase of a business entity, entities, an asset, or assets. Although often used interchangeably, an acquisition differs from a merger in that the acquiring company (the acquirer) is typically significantly larger than the asset or entity being purchased (the target). Acquisitions can take several forms, including the following:

  • Acquisition of assets: An acquisition of assets is the purchase of an asset or group of assets, and the direct liabilities associated with those assets.

  • Acquisition of equity: An acquisition of equity is the purchase of equity interest in a business entity. The differences between an acquisition of assets and an acquisition of equity are important from a legal, regulatory, accounting, and modeling perspective.

  • Leveraged buyout: A leveraged buyout (LBO) is an acquisition using a significant amount of debt to meet the cost of acquisition.

  • Management buyout: A management buyout (MBO) is a form of acquisition where a company’s existing managers acquire a large part or all of the business entity. Acquisitions can be considered hostile or friendly, depending on the assertive nature of the process.

  • Friendly acquisition: An acquisition accomplished in agreement with the target company’s management and board of directors; a public offer of stock or cash for example is made by the acquiring firm, and the board of the target firm will publicly approve the terms.

  • Hostile acquisition: An acquisition that is accomplished not by coming to an agreement with the target company’s management or board of directors, but by going through other means to get acquisition approval, such as directly to the company’s shareholders; a tender offer, and a proxy fight are ways to solicit support from shareholders without direct approval from company management.

Mergers, consolidations, and acquisitions can be categorized further:

  • Horizontal: A horizontal transaction is between business entities within the same industry. Such a combination would potentially increase market share of a business in that particular industry.

  • Vertical: A vertical transaction is between business entities operating at different levels within an industry’s supply chain. Synergies created by merging such firms would benefit both. A good example is within the oil and gas industry. In the oil and gas industry, you have exploration and production (E&P) companies that drill for oil. Once oil is found, the wells are producing, and the energy is refined, distribution companies or pipeline companies transport the product to retail for access to the customer, such as a gas station. So in this example, an E&P company purchasing a pipeline company or a gas station would represent vertical integration—a vertical merger. In contrast, an E&P company purchasing another E&P company is a horizontal merger.

  • Conglomerate: A transaction between two or more unrelated business entities—entities that basically have no business activity in common; there are two major types of conglomerate transactions: pure and mixed. Pure conglomerate transactions involve business entities that are completely unrelated, while mixed conglomerate transactions involve firms that are looking for product extensions or market extensions.

Divestiture: A divestiture is the sale of an interest of a business entity, an asset, or group of assets. Divestitures can be delineated further:

  • Asset divestiture: An asset divestiture is the sale of an asset or group of assets.

  • Spin-off: A spin-off occurs when a parent company creates a separate entity and distributes shares in that entity to its shareholders as a dividend.

  • Equity carve-out: An equity carve-out occurs when a parent company sells a percentage of the equity of a subsidiary to the public. This is also known as a partial IPO.

Other restructurings: Mergers, consolidations, acquisitions, and divestitures can all be considered types of business restructurings as they all involve some level of reorganization aimed to increase business profitability. Although the foregoing are just major categories, other types of business restructurings can be considered to help fuel growth. A share buyback, for example, is when a company buys back shares in the open market. This creates an anti-dilutive effect, hopefully fueling an increase in company stock price. A workforce reduction is another example of a way to reduce costs and improve earnings performance.

Each of these strategies represents other restructuring ways aimed at improving business value.



Achille Ekeu, MBA, CVA

President & CEO

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