Merger is a combination of two or more independent businesses into a single corporation. A merger usually involves acquisition, one company absorbing one or more other companies. In a friendly take-over, the shareholders and directors of two or more independent firms agree to combine their firms. In a hostile take-over, an individual, group, or firm known as a raider acquires a sufficiently large portion of a company’s stock to gain control or ownership of the company.
Mergers can occur in several ways. Usually, one firm buys the assets of another firm with cash or securities. Sometimes one company purchases the stock of another company by offering to pay a predetermined price for every share. Another way involves an exchange of stock between companies. In some cases, a buyer purchases a firm through an arrangement called a leveraged buyout. In this type of acquisition, the buyer borrows the needed funds and then repays the loan largely with money earned by running the company more efficiently than the previous owners.
There are a number of different types of mergers. A horizontal merger, for example, combines firms that produce the same product or service for the same market. A market extensional merger involves firms that produce the same good or service for different markets. A vertical merger joins a supplier and a user, such as a tire company and an automaker. Sometimes the merged business is not related to that of the acquiring firm, in which case the new business is called a conglomerate.
The main benefit of a merger is that it can help increase the efficiency of an organization. However, many mergers do not work out because the two firms cannot combine their resources effectively. In addition, some critics of horizontal mergers fear that the merged companies might gain significant control of an entire industry, eliminate competition, and raise prices.
See also Bank (Diversification and mergers) .
