Reporting on the difference between mergers and acquisitions

USA Today financial markets reporter Matt Krantz has a great explanation Wednesday of one of the first rules that every business journalist should learn — that when two companies call their deal a “merger,” it’s usually an “acquisition.”

A reader wrote into Krantz and suggested he might have gotten it wrong when he wrote that Lucent was being bought by Alcatel. As proof that Krantz was wrong, the reader noted that the Lucent CEO would be in charge of the new company.

Krantz replied, “One of the first things I learned in business journalism is that there’s no such thing as a merger.

“With few exceptions, when companies say they ‘merged,’ what they’re really saying is that one company was acquired. Why don’t they just say that? Maybe it’s an ego thing, but for whatever reason, many acquired companies don’t want to fess up. And the acquiring company helps the target save face.

“That’s kind of what happened here. The companies went to great lengths to try to hide the fact that Alcatel was buying Lucent. They used terms like ‘merger of equals’ to disguise the fact. Some investors might think — that Lucent is an equal in the deal because Lucent CEO Pat Russo will be CEO of the new company.

“But as savvy investors know, to find the truth, follow the money.

“Look at the terms of the deal: A seller is the party who gets something of value in exchange for giving up their stake in a company. And that’s what’s going on with Lucent shareholders. Lucent holders are getting 0.1952 of a share of Alcatel stock for every Lucent share they own. And get this: The ordinary shares will trade on the Euronext Paris and only derivatives, called American Depositary Shares, will trade on the New York Stock Exchange. The company will be incorporated in France and the executive offices will be in Paris.

“And after all the shares are exchanged, former Lucent shareholders will own just 40% of the combined company; Alcatel shareholders will own 60%.”

Read more here. I recently got into somewhat of a friendly disagreement with a business reporter — who is a former investment banker — when I made the same case that Krantz is making. But I stand by what I said then, and what Krantz says now — there are very few, if any, mergers. It’s always one company getting the better end of the deal.

Unfortunately, there still seem to be business journalists who don’t know the difference between a merger and an acquisition.