Merger

Reviewed by Bhavana | Updated on Aug 27, 2020

What is the Meaning of a Merger?

A merger is a deal that unifies two existing firms into one new company. There are several kinds of mergers; there are also several explanations as to why mergers are done by businesses. Mergers and acquisitions are usually undertaken to extend the size of a business, grow into new markets or gain market share. Much of this is intended to increase shareholder value. Often, businesses have a no-shop clause in place after a merger to prohibit other firms from buying or combining. A merger is a voluntary union of two entities into a single legal entity on broadly equal terms.

How Does a Merger Function?

A merger is the negotiated combining of two entities into one single legal entity at roughly equal terms. Companies who agree to combine are approximately equal in terms of population, consumer, operating cost, etc. The word "merger of equals" is often used for this purpose. Acquisitions, unlike mergers, are generally not voluntary and require an aggressive acquisition of another business.

Mergers are most often undertaken to gain market share, cut operating costs, extend into new markets, combine common goods, raise sales, and increase profits — all of which would help the shareholders of the companies. Following a merger, the new company's shares are allocated to current owners in both initial companies.

Types of Mergers

  1. Conglomerate: It is a merger of two or more companies involved in unrelated business operations. The companies can operate in various industries or in different geographic regions.

  2. Congeneric: A congeneric merger is also called the Product Extension merger. It is a merger of two or more companies operating in the same market or industry, with overlapping factors such as marketing, technology, research and development (R&D), and manufacturing processes.

  3. Horizontal: A horizontal merger occurs among firms that work in the same sector. Usually the merger is part of competition between two or more companies that sell the same goods or services.

  4. Market Extension: This form of merger occurs between companies selling the same goods but competing in different markets.

  5. Vertical: A vertical merger happens when two firms working at different levels within the supply chain of the same company integrate their operations.