What Is a Merger?

What Is a Merger?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A merger is a business strategy where two companies combine their assets, both tangible and intangible, to function as a single new entity. Companies plan for mergers for a range of reasons, which include expanding into new markets, increasing their customer base, gaining a competitive edge over rivals, or improving their financial health by leveraging synergies. The process involves various steps, such as the agreement of preliminary terms, due diligence, negotiation and final agreement, and regulatory approval. The final outcome is the creation of a merged company that ideally possesses more market share, greater efficiency, and enhanced profitability.

Related Questions

1. What is the difference between a merger and an acquisition?

While both involve the combination of two companies, a merger usually implies a more equal partnership where both companies agree to progress as a single new company. An acquisition, on the other hand, usually involves a larger company purchasing a smaller one, and the smaller company does not retain its identity.

2. What are the benefits of a merger?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

A merger can lead to numerous benefits such as cost-efficiency through economies of scale, increased market share, diversification, cross-selling opportunities, and improved competitiveness. Mergers can also support companies’ growth without the need for organic expansion.

3. What are the drawbacks of a merger?

Mergers also have potential drawbacks. Cultural conflicts between merging companies can lead to instability and employee dissatisfaction. Furthermore, a merger’s initial costs can be high, and anticipated benefits may not materialize as expected. Antitrust laws can also pose challenges, as regulatory bodies may block mergers leading to excessive market concentration.

4. What is a hostile merger?

A hostile merger, often referred to as a hostile takeover, involves one company acquiring another against the wishes of the target company’s management and board of directors. This often happens when the acquiring company buys majority shares of the target company in the open market or directly from shareholders.

5. What are the different types of mergers?

Mergers come in several types, including horizontal mergers between direct competitors, vertical mergers between customer and supplier companies, and conglomerate mergers between companies in completely different industries. There are also market-extension and product-extension mergers, where companies share a market or product line but aren’t direct competitors.