Merger Definition In Business: Everything You Need to Know
A merger definition in business often refers to a corporate strategy where different companies will combine into one company, either to strengthen their financial or operational position.3 min read
A merger definition in business often refers to a corporate strategy where different companies will combine into one company, either to strengthen their financial or operational position. Companies may also try to merge to increase their scale and productivity. Mergers can drastically affect stock before the merger of businesses occurs.
When a merger occurs, the owners of both corporations will continue on as owners of the new company. There are different ways to classify a merger. Sometimes mergers are referred to as:
- A vertical integration. This type of a merger often refers to two companies that were in a previous supplier/customer relationship.
- A horizontal integration. When a merger is referred to as a horizontal integration, the two business were previously competitors.
To complete the transfer of ownership after a merger, stock from the companies will either be transferred, swapped, or there will be a cash payment that occurs between the two companies.
Once a merger has been completed, the newly formed company may choose to implement new branding. If you choose not to completely rebrand, you can use both company names to identify the new company. In 2015 alone, there was more than 4 trillion dollars worth of mergers and acquisition in the company showing that it is a popular way to grow the revenue of companies.
Reasons Why Companies Merge
There are many reasons that companies may decide to merge with another company. The most common reasons companies will embark on a merger are:
- To save on production costs
- To generate capital to expand their market reach
- To gain proprietary or technical knowledge
- To expand to new territories
- To grow revenue and increase profits
When a merger has been completed, the new company will need to issue shares of stock to the original shareholders of the previous companies. Mergers are done to benefit the shareholders, and the companies often become stronger in the market by having stronger assets, competencies, and markets.
Smart business mergers will be successful at providing both companies with the ability to:
- Reach a new market
- Reach more customers
- Fill gaps in each company's abilities
- Push out the competition
Companies can achieve these goals in a merger if they select a complementary company that provides them with the ability to:
- Acquire additional products
- Open up new distribution channels
- Have the cash or infrastructure to push the success of the company
There are many steps that you should follow to help ensure that the merger is the best decision for both companies involved. Some of the most important steps to complete include:
- Do your homework to make sure you are choosing the right company.
- Decide whether a merger with the company chosen will be in the best interest of your company.
Once you have determined that a merger is in your company's best interest, there are some steps you will need to take to prepare yourself for the upcoming merger. You will need to:
- Get your balance sheet in order
- Cut poor performing products
- Cut excess fringe benefits
- Remove any inside deals that are in place
- Ensure your taxes have been paid
- Prepare two years of audited financial statements
Remember that if you provide a unique product or an exclusive distribution channel, the company you are merging with may be willing to pay a premium price to be able to merge. It is also important when choosing a competitor to merge with that you don't broker a deal with one that was interested in pushing you out of the space. They may not be interested in preserving the business and may simply want to cut off the competition.
Risks of Mergers
Mergers sometimes do not strengthen a company, but end up diluting their financial strength. This can occur more commonly if the newly formed merged company issues more stocks across the same asset base of the two companies before the merger. Mergers can also fail if the cultures between the two corporations do not mesh well, there is resistance to the restructuring of management or operating procedure, technologies are incompatible, or the workforce experiences disruption. If a merger is a difficult implementation but one company still wants to join with the other, an acquisition may occur by the stronger company purchasing the weaker one.
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