Over the weekend, Potash Corporation of Saskatchewan (USA) POT 0.19% and Agrium Inc.(USA) AGU 0.49% announced a merger of equals in which the two companies will join forces to form one of the largest fertilizer companies in the world. The deal was announced as a merger rather than a takeover, despite the fact that Potash shareholders will own 52 percent of the combined company.

Which begs the question: What is the difference between a takeover and a merger?

In general terms, a merger is simply the combination of two companies that are of relatively the same size. The motivation for a merger is that the two companies can benefit from cost-cutting and synergies if they join forces, hopefully unlocking value for shareholders. During a merger of equals, shareholders typically maintain an equal percentage stake in the combined company, and the management positions at the new company are often split between down the middle.

A buyout, on the other hand, is simply one company purchasing a smaller company. In that scenario, the buyer typically offers cash and/or shares of its own stock (at a given conversion ratio) to shareholders of the target company. These buyout bids often come at a significant premium to the market price of the target at the time of the offer, and buyouts are typically seen as good news for shareholders of the company that is acquired. The buyer typically maintains…

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