About Mergers Acquisitions and Consolidations

When a merger takes place, the corporation that is being taken over will no longer exist. The corporation taking over the other corporation assumes all the rights, liabilities, and privileges of the company that was taken over and merged with. An acquisition is one business taking over another with the smaller company absorbed. A new company is not formed.

With a consolidation, both corporations lose their separate identities. The goal of the consolidation is to unite and form as one completely new corporation. Mergers and acquisitions are regulated by federal and state laws. Regulation of mergers by the government is most concerned with companies that are direct rivals since a merger could reduce competition resulting in the restricted output of a product and increased prices.

While mergers are scrutinized by the government, it is less aggressive than in the past.

Benefits of Mergers and Acquisitions

  • Mergers can result in better management or technical savvy to support underused assets.
  • Regulates scale and scope, which reduces costs, increases output, and improves quality.
  • The possibility of a takeover may inspire managers to work more diligently to produce profits.
  • Enables business owners to sell to someone already familiar with the industry to garner the highest price for the company.
  • Generates interest by new entrepreneurs forming firms due to the prospect of lucrative sales.
  • Many types of mergers pose very few risks to the competition.

Types of Mergers

Horizontal Merger

With a horizontal merger, one firm selling a product or products acquires another firm selling products that are the same or similar. Their selling market is in the same geographic location as the other company. By acquiring the second corporation, the first eliminates the competition between the two firms.

Horizontal mergers have three basic problems relating to competitiveness. First, the merger eliminates competition between the two companies, which can have significant results. Second, the merger between the two companies may create a substantial shift in market power, resulting in increased prices by reducing output. Third, by increasing concentration in the market, other participants or competitors may begin to regulate/coordinate their pricing and output production.

Vertical Merger

Simply put, one firm acquires either a supplier or a customer. Buying the firm/customer is referred to as a forward integration. Acquiring a supplier is referred to as a backward integration.

Conglomerate Mergers

This type of merger includes acquisitions where the parties that are merging have no relationship, such as an appliance manufacturer purchasing a shoe manufacturer. Conglomerate mergers can include other forms, such as short-term joint ventures.

Geographic Extension Mergers

A geographic extension merger is when a buyer makes the same product as the targeted business but does so in a different location.

Product Extension Mergers

Product extension mergers occur when a firm that produces a product purchases a firm with a different product but the application of manufacturing and marketing the two products are similar. An example would be a manufacturer of household detergents purchasing a company that manufacturers liquid bleach.

Accomplishing a Corporate Merger

The state has established statutes and procedures to follow to complete a corporate merger. The board of directors for each corporation will craft and pass a resolution outlining the specifics of the corporations involved in the merger. This includes the names of the corporations, the name chosen for the proposed merged company, how the shares for both corporations will be converted, and other legal provisions.

The shareholders of each corporation are notified informing them of a meeting to approve the merger. If the specified number of shareholders agree, the directors sign and file the appropriate papers with the state. A certificate of the merger will be issued by the Secretary of State to authorize the new company.

For corporation's in two different states, statutes often note that each corporation must follow the statutes for their respective state before the merger can be in effect. Some statutes permit a corporation's directors to abandon the plan for a merger at any time leading up to the point where the final papers are filed with the state.

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