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What is a merger in business?

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Last editedApr 20213 min read

Businesses interested in expanding their reach might decide to join forces using a merger agreement. What is a merger, and how does it differ from an acquisition? Learn more about the different types of mergers below.

Understanding company mergers

When two existing companies decide to unite into a single new company, this is called a merger. Merger agreements are designed to increase shareholder value through growth. After the merger agreement is complete, existing shareholders of both original companies gain shares of the new company that’s been created.

Apart from the benefit to company shareholders, there are also benefits to company operations. Some mergers will help both companies expand their reach, while others will expand activities into new segments and markets. Here are a few more reasons why companies take part in mergers:

  • Gain market share

  • Unite similar products

  • Reduce manufacturing costs

  • Increase in revenues

What is the difference between mergers and acquisitions?

The terms “merger” and “acquisition” are often used synonymously, but there are a few key differences between the pair.

  • Mergers create a single legal entity by combining two previously existing, separate businesses. True mergers are less common than acquisitions, because the two companies don’t usually benefit from combining resources and staff at even the highest executive levels.

  • Acquisitions do not result in a new company being formed. Instead, an acquiring company purchases and absorbs the second company. While mergers are fully voluntary, acquisitions might not be. The acquired company is often liquidated.

Types of mergers

There are five main types of mergers, each of which offers unique benefits and challenges to the companies in question.

1. Conglomerate merger

A conglomerate is formed by two or more companies that participate in unrelated activities. For example, two firms in different industries that have nothing in common will team up to enhance value. This is called a pure conglomerate.

A mixed conglomerate merger occurs when two or more organisations aim to gain market extensions. Although they operate in unrelated business activities, they’re interested in expanding their markets using the other company’s resources.

2. Congeneric merger

A second type of company merger is called a congeneric or product extension merger. This involves two or more companies that have some overlapping factors but don’t sell identical products. They also operate in the same sector. For example, one company might decide to merge with a second in order to add to the second company’s product line. Both expand their product range by merging, thus gaining access to a wider target audience.

3. Market extension merger

While a congeneric merger involves companies selling similar products in similar markets, a market extension involves companies that compete with similar products in different markets. By merging, they gain access to a wider market and client base. Both companies could be considered broadly equal, because they offer the same product types. By fusing together, they create a new legal entity with far greater value.

4. Horizontal merger

What if there are two competing companies in the same industry? When they decide to consolidate resources to offer the same products or services on a wider scale to expand market share, this is called a horizontal merger. There are many examples of this type of company merger in the auto industry. For example, in 1998 Chrysler merged with Daimler-Benz to increase the economies of scale for both companies.

5. Vertical merger

When two companies belong to the same industry but at different levels of the supply chain, this is called a vertical merger. One company might produce parts that the second company needs to manufacture its own products. By merging supply companies with their purchasers, it cuts out the middleman and – ideally – saves money for both parties. For example, an auto parts manufacturer might merge with a company that provides the raw materials needed to manufacture those parts.

How to conduct a company merger

If you’re thinking of merging with or acquiring another company, there are a few steps to keep in mind.

Carry out a business valuation to determine how much the other company is worth. With a pure merger, both businesses should hold similar value. Otherwise, you’ll need to consider whether you can afford to buy them out.

Write up your merger or acquisition agreement, allowing for the purchase of shares and assets. Be sure to have it reviewed by an attorney and include all relevant background information.

Transfer the business ownership according to the terms of your mergers and acquisitions agreement. After completion, you’ll need to register the new company. This might require new bank accounts, tax IDs, and licenses depending on your industry.

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