A merger is a combination of two or more entities into a single entity by an exchange of shares or ownership interests. The acquiring firm assumes the liabilities of all entities in a merger, and the former entities cease to exist.
Companies merge to achieve economies of scale by consolidating operations, thereby driving more dollars to the bottom line. Mergers can also enable firms to increase their market coverage and gain access to new markets. However, they can lead to inefficiencies and a lack of coordination between the firms’ cultures. A merger can also cause job losses and affect employee morale, which can have a direct impact on productivity.
The main types of mergers include horizontal, vertical, conglomerate, and product-extension. A horizontal merger involves firms competing in the same industry, whereas a vertical merger is between firms that offer similar products. A conglomerate merger is a combination of two or more different industries and/or geographical regions. The main objectives of conglomerate mergers are to gain access to new markets and diversify their investment opportunities.
In a merger, shareholders of the acquired company may be compensated in either cash or shares. In most cases, the acquiring company will purchase the target company’s shares and ownership interests. In some instances, the acquiring company will negotiate with shareholders of the acquired firm to exchange their shares for the acquiring firm’s shares. The resulting transaction is known as a “friendly” merger. Alternatively, the acquiring firm can attempt to buy out the targeted company and take control by force, which is referred to as a hostile merger.
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