The Basics Of Mergers and Acquisitions: What is a Business Merger?

In the world of business, mergers and acquisitions are a common occurrence. A merger is a type of business combination in which two separate entities come together to form a new entity. This new entity typically combines the assets, employees, and operations of the two original companies. A merger can also refer to the acquisition of one company by another, resulting in the absorption of the acquired company into the acquiring company.

The process of a merger involves a legal and financial evaluation of both companies, negotiation of terms and agreements, and the approval of shareholders. Depending on the type of merger, the ownership structure of the new entity may vary. Mergers can be horizontal, vertical, conglomerate, or congeneric in nature, each with its own distinctive characteristics.

Understanding mergers is important for both business owners and investors, as mergers can have a significant impact on market share and the overall business landscape. In this article, we will explore the different types of mergers and acquisitions, the merger process, and the implications for business ownership and market share.

Key Takeaways

• A business merger involves the combination of two separate entities to form a new entity.
• The process of a merger involves a legal and financial evaluation of both companies, negotiation of terms and agreements, and the approval of shareholders.
• Mergers can be horizontal, vertical, conglomerate, or congeneric in nature, each with its own distinctive characteristics.
• Understanding mergers is important for both business owners and investors, as mergers can have a significant impact on market share and the overall business landscape.
• This article will explore the different types of mergers and acquisitions, the merger process, and the implications for business ownership and market share.

Types of Mergers and Acquisitions

There are different types of mergers that companies attempt to achieve their business objectives. Each merger type has its own unique characteristics and implications for business ownership. Here are the most common types of mergers:

Horizontal Merger

A horizontal merger is a type of merger where two companies in the same industry merge to form a new entity. The purpose is to consolidate market share and achieve economies of scale. This kind of merger can reduce competition, resulting in higher prices for consumers. A well-known example of this type of merger occurred in 1998 when Exxon merged with Mobil to become ExxonMobil, one of the world’s leading oil companies.

Vertical Merger

A vertical merger is a type of merger where two companies in the same industry but different stages of the production process merge. In this type of merger, one company acquires another company that is either a supplier or a customer. A vertical merger can create efficiencies and cost savings by streamlining the supply chain. However, it can also give the merged company too much control over the market, leading to antitrust issues. An example of this type of merger is the acquisition of Time Warner by AT&T.

Conglomerate Merger

A conglomerate merger is a type of merger where two companies in completely different industries merge. The purpose of this type of merger is usually to diversify revenue streams and spread risks across different industries. Conglomerate mergers can create synergies by combining different business competencies. An example of this type of merger is the merger between Disney and ABC in 1995, bringing together a media conglomerate and a broadcasting network.

Congeneric Merger

A congeneric merger is a type of merger where two companies in the same industry but different product lines merge. In this type of merger, one company acquires another company with similar products but different markets. Congeneric mergers can create synergies by combining similar business models. An example of this type of merger is the acquisition of Skype by Microsoft in 2011, bringing together a software company and an internet-telephony company.

Market Extension Merger

A market extension merger is a type of merger where two companies selling the same products in different markets merge. The purpose of this type of merger is to expand market share and increase sales. Market extension mergers can create synergies by combining different geographic competencies. An example of this type of merger is the acquisition of Kentucky Fried Chicken by PepsiCo in 1986, bringing together a soft drink company and a fast-food restaurant chain.

Product Extension Merger

A product extension merger is a type of merger where two companies selling different but complementary products merge. The purpose of this type of merger is to expand product offerings and increase sales. Product extension mergers can create synergies by combining different product competencies. An example of this type of merger is the acquisition of Nestle’s ice cream division by R&R Ice Cream in 2016, bringing together two ice cream companies with different product offerings.

The Merger Process: From Business Valuation to Agreement

Before two companies can merge, the first step is to value each business. This assessment looks at the financial health of the companies and determines how much they are worth. The resulting figure is used as a guide for negotiations, allowing both parties to agree on a fair price for the acquisition or merger.

There are several types of mergers, each with its own unique characteristics. The most common type is a horizontal merger, which takes place between two companies that operate in the same industry. A vertical merger, on the other hand, occurs between companies that operate in different stages of the supply chain. Conglomerate mergers involve businesses that are unrelated, while congeneric mergers occur between companies that sell related products or services.

Once the type of merger is decided, the next step is to negotiate and agree on the terms of the merger or acquisition. This is done through a merger or acquisition agreement, which outlines the terms and conditions of the transaction. Shareholders also have a say in the process, as they must approve any takeover or merger.

In some cases, a reverse merger may occur, in which a private company takes over a public company, effectively becoming a publicly-traded entity without going through an initial public offering (IPO). Such a merger can provide a faster and cheaper way for a company to go public and access capital markets.

Valuation: The First Step

Valuation is a process that takes into account various factors like financial statements, assets, liabilities, and other factors to determine the value of a business. It is an important step before a merger, as it allows both parties to agree on a fair price for the transaction.

There are several ways to value a business, including asset-based valuation, market value valuation, discounted cash flow valuation, and others. Each method has its own strengths and weaknesses, and the selection of the method depends on the specific circumstances of the transaction.

Types of Mergers

Horizontal mergers are those between companies that operate in the same industry. These mergers allow companies to expand their market share by taking over competitors, resulting in increased economies of scale. Vertical mergers, on the other hand, occur between companies that operate in different stages of the supply chain. These mergers allow companies to reduce costs and improve efficiency by integrating production and distribution processes.

Conglomerate mergers occur when companies that are unrelated come together to form a new business entity. These mergers are usually driven by diversification strategies, allowing companies to enter new markets and reduce risks associated with a single business line. Congeneric mergers occur between companies that sell related products or services, providing opportunities for cross-selling and synergies between businesses.

The Merger or Acquisition Agreement

The merger or acquisition agreement is a legal document that outlines the terms and conditions of the transaction. It includes details such as the purchase price, payment terms, and the rights of shareholders. It is an important document that establishes the framework for the transaction and ensures that both parties are on the same page. Seek the advice of a lawyer who is familiar with the laws surrounding mergers and acquisitions.

Shareholder Approval

Shareholders play an important role in the merger process. They must approve any takeover or merger, as it can have a significant impact on the value of their investment. Shareholders may have different opinions on the proposed transaction, and it is the responsibility of the board of directors to ensure that the transaction is in the best interest of the company and its shareholders.

Reverse Mergers

A reverse merger is a type of merger in which a private company takes over a public company, effectively becoming a publicly-traded entity without going through an initial public offering (IPO). This type of merger is becoming increasingly popular, as it provides a faster and cheaper way for companies to go public and access capital markets.

Understanding the Implications: Impact on Companies and Market Share

When two companies merge, they form a new legal entity known as a merged company. This new entity represents a consolidation of resources and expertise, which can have significant implications for market share and competition within the industry.