In a general sense, mergers and takeovers are very similar corporate actions - they combine two previously separate legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long term.

The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different.

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "Equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the oldcompany exchanged for an equal number of shares in the merged entity. For example, back in 1998, Anerican Automaker, Chryseler Corp, merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organisations became joint leaders in the new organisation. The merger was thought to be qite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presence in North America.

A takeover, or acquisition, on the other hand, is characterised by the purcahse of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily hve to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance form the smaller company's management. Unlike in a merger, in an acquisition, the acquirig firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

Target companies can employ a large number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over. 

In a general sense, mergers and takeovers are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long term.

This article was from http://www.investopedia.com/ask/answers/05/mergervstakeover.asp

It has enlightened me in distinguishing the main difference between a merger and a takeover with good elaboration and evidence. I always had this impression that merger would be equivalent to a takeover as there is bound to be a comparatively larger firm out of the two, who will be capable and wealthy enough to buy over the smaller firm. However, after reading this article and the previous one I posted about, it is evident that merger will not result in takeover most of the time, if both parties negotiate well and maintain an amiable partnership. If both parties remain warm and welcoming, both will benefit in terms of their investment in shares and profits in time to come. However, in a takeover, the small firm gets swallowed up and if this scenario takes place more often in future, we might just end up with a few monopolies in the market without any competition. Therefore. I feel that the issue of merger between two firms should be done with careful deliberation and thought before execution, as a hostile relationship or something that has not been negotiated and agreed upon properly, might result in a takeover.

Posted by: Zelei