Mergers are the process of combining two companies of roughly the same size to form a new company. In a merger, the two companies blend their assets and liabilities.
Definition and Example of Merging
A merger is when two companies of approximately the same size come together in a way that results in the formation of a new company. In a merger, the two companies consolidate their assets and liabilities.
Technically, a merger is different from an acquisition in that a merger combines the resources of both companies equally to form a new entity. In an acquisition, one company purchases another outright and assumes its assets and liabilities, thus becoming a larger company.
However, in reality these days, the term “merger” is often used to refer to an acquisition. True mergers are very rare.
It is common for a company to merge with (or acquire) another company for financial benefits. Merging can help the acquiring company expand its services, increase its market share, eliminate a competitor, and achieve economies of scale (lower production costs due to increased output).
A merger between two large companies can reduce or eliminate competition, leading to higher prices or a reduction in goods or services with lower quality, or less innovation. Mergers that affect trade and involve companies over a certain size are reviewed by the Federal Trade Commission and the U.S. Department of Justice to protect consumers and prevent monopolies or joint monopolies.
One notable merger in recent history was the merger of media giant “Time Warner” with leading internet company “AOL” in 2001. The combined value of the two companies when the merger was first announced in 2000 was $350 billion.
There was a significant amount of opposition to the merger for consumer protection reasons, but the Federal Trade Commission (FTC) eventually approved the merger.
The dot-com bubble burst shortly after the merger was approved, followed by an economic recession, and advertising revenues for AOL Time Warner plummeted. In 2002, the merged company reported a loss of $98.7 billion, and then “Time Warner” spun off “AOL” in 2009.
Other mergers have enjoyed greater success, such as the merger of “Exxon” and “Mobil” in 1999, which formed “Exxon Mobil Corp.” That company continues to operate today.
How Does Merging Work?
Merging often requires approval from shareholders or key stakeholders, depending on state laws.
If you own shares in a public company participating in a proposed merger, you should receive information about the merger from the company, according to SEC regulations. The notice should include information about the target company and the acquiring company and the terms of the merger.
The merged companies must also register changes within their state, according to the laws of the states in which they are located, obtain new state and federal tax IDs, and take steps to legally dissolve the old companies.
Common mistakes that companies may make during the merger process include not advancing the discovery process quickly, poor reasoning, insufficient security with information, and inflating expectations and assumptions.
After the merger, shareholders of both companies receive shares in the newly formed company.
Types of Mergers
Mergers are often classified according to the goals of the companies involved. These categories include:
- Horizontal Merger: When two competitors come together. It is a classic example of a merger that eliminates competition and creates economies of scale. An example of this is the merger of “Exxon” and “Mobil.”
- Vertical Merger: When two companies operating in the same industry but at different levels in the supply chain merge. An example of this is the merger of “AT&T” with “Time Warner” in 2016, where “Time Warner” was an entertainment company while “AT&T” was a telecommunications company.
- Merger
- Conglomerate: When merged companies are involved in unrelated business activities and do not have a buyer-seller relationship. These mergers help companies expand their brand presence and product range.
- Market Expansion Merger: When two companies offer the same product or service but operate in different markets. As the name suggests, this type of merger is typically executed to expand the reach of both companies and increase customer numbers.
- Product Expansion Merger: When two companies that offer different but related products or services in the same market merge. This type of merger allows companies to consolidate their offerings, benefit from economies of scale, and increase their customer base.
Mergers can be part of a company’s long-term strategy to increase market reach, expand product lines, and create value for shareholders by forming a larger new entity. However, challenges may arise for companies that find it difficult to align workplace cultures and achieve common goals.
Takeaway
A merger is when two companies of roughly the same size combine to form a new company from the resources of both companies. Mergers can help companies increase their customer base, expand product lines, gain market share, and capitalize on economies of scale. Typically, mergers of public companies are approved by shareholders of all involved companies and are subject to Federal Trade Commission (FTC) approval. The FTC aims to protect consumers from monopolies and unfair competitive practices. Mergers can be an effective way to build a stronger, more profitable company, although not all mergers are successful.
Sources:
U.S. Small Business Administration. “Merge and Acquire Businesses.” Accessed Oct. 7, 2021.
Federal Trade Commission. “Mergers.” Accessed Oct. 7, 2021.
Federal Communications Commission. “AOL and Time Warner Link: Transaction Overview.” Accessed Oct. 7, 2021.
Federal Trade Commission. “FTC Approves AOL/Time Warner Merger with Conditions.” Accessed Oct. 7, 2021.
ExxonMobil. “Our History.” Accessed Oct. 7, 2021.
Proviti. “Guide to Mergers and Acquisitions.” Accessed Oct. 7, 2021.
“Mergers, Acquisitions, and Corporate Restructurings.” Page 13. Accessed Oct. 7, 2021.
Minority Business Development Agency. “5 Types of Company Mergers.” Accessed Oct. 7, 2021.
AT&T. “AT&T to Acquire Time Warner.” Accessed Oct. 7, 2021.
Source: https://www.thebalancemoney.com/what-is-a-merger-5204998
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