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A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company while an acquisition is the purchasing of one company by another with no new company being formed.

Merger

When one company purchases another company of an approximately similar size, the two companies come together to become one.

Two companies usually agree to merge when they feel that they can do something together that they can't do on their own.

For example, AOL and Time Warner merged a few years back in hopes that they could both gain something. AOL wanted access to Time Warner's cable network. Time Warner wanted access to AOL's users (to promote movies and other Time Warner products) as well as AOL's extensive internet content.

Acquisition

An acquisition is when one larger company purchases a smaller company. Usually, the company that is being acquired typically sees its stock price appreciate right after the news is announced. The company doing the buying usually sees its stock price fall.

Sometimes mergers and acquisitions can turn ugly. Watch out for your companies if this happens, because sometimes the stock prices can drop significantly on the news.