A merger between companies can occur for numerous reasons. Though only a few business owners set up their businesses with the intention of merging with a different company, the best business mergers can prove profitable. Find out about the various types of mergers and the benefits they bring.

A merger of a company occurs when two firms join to form a new entity that has one stock. While a merger is usually seen as an equal split where each of the parties owns 50 percent of the new business but that’s not always situation. In some mergers where an original companies receives a higher percentage of the shares of the new business.

The most important thing to remember is that a merger is when two businesses are joined to form a company, and it is accompanied by new stock.

Why do companies merge?

What Is a Business Merger

Mergers can be a fantastic method for two businesses with distinct experience and know-how to join forces and create one company which is more profitable than the two companies could have been on their on their own.

There are many reasons two businesses might decide to combine. Sometimes, it’s because for convenience and others, it’s out of necessity. Whatever the reason the purpose of merging is to benefit from opportunities that exist in the market that will benefit both businesses.

“The companies might be trying to profit from financial synergies as well as opportunities for efficiency and new market dynamics, or the possibility of product diversification, just to mention several things,” James Cassel, chairman and co-founder of Cassel Salpeter & Co. said in Business News Daily. “The companies could discover opportunities by joining product lines as well by cutting down on redundancies like having two CFOs, when one can be sufficient for both businesses if they merge.”

The main takeaway is that a merger can be beneficial to companies by increasing profits, improving knowledge, expanding market share and diversifying products and reduce redundancy.

Read Also: Is Foreign Exchange Buying and selling Worthwhile? This is What You Must Know 

What is the process for a merger of a business?

A merger between companies takes place when two companies that have similar synergies determine that being one entity will result in more profit than having two distinct entities. When a merger is completed, the firms involved will undergo a significant amount of restructuring , particularly in the areas of management and operations.

When a merger of companies takes place when two companies merge, they could convert their stock into one, new stock of the company. They must first decide what the worth of each business is, and then they split the ownership of the new business in accordance with the value of each company. [Read the article How to Calculate Your Business ValueThen, they must decide what each company’s worth.

“For instance, it might be discovered that the A company is valued at hundred million and company B is worth $200 million, which makes the valuation of this new entity of $300 million.” stated Terry Monroe, founder and president of American Business Brokers & Advisors. “Therefore the stock of both companies will be surrendered and new shares will be issued under to the brand name of the business in accordance with the value at $300 million. Stock owners of company A will be given one share of the stock in the new entity, and stock owners from company B would receive 2 shares in the new corporation.”

While the idea of creating an entirely new stock for the new entity sounds perfect in theory, it’s not always the case. In reality, most of the time, when two companies join forces one of them will purchase the other’s shares of common stock for the exchange for its own shares.

The main takeaway is that when entities join, they could convert their stock into a new one and split it between the new owners on the basis of the previous value.

What is the main difference between the merger and the acquisition?

The terms mergers and acquisitions are often viewed with the same meaning, however there are some distinctions. Both involve the amalgamation of two companies, an acquisition happens the process whereby one company purchases and manages the other, while merging is the process where two companies join to create a new company.

“A majority often, there isn’t any money involved in a merger. However, an acquisition occurs when one business pays for the purchase of another business, whether with cash or through the issue of shares or the assumption of debt or the above methods,” Monroe said. “With an acquisition company that is buying will be in operation, and the company that was purchased will not longer exist.”

Because an acquisition, also known as taking over, is the process of one business consuming another and vice versa, the leadership of both companies is often the same. Mergers however, frequently involve the restructuring of the corporate leadership structure that can lead to problems when both businesses have strong leaders with divergent opinions about how to manage the new entity.

In particular, you’ll likely need to choose which president or CEO of the two companies that are merging will lead the newly-merged company. Even though some merger companies try to include two CEOs from both firms share leadership via a co-CEO model however, this approach rarely works out as well, Monroe said. Business leaders must keep in mind when they are considering mergers or acquisitions.

The most important thing to remember is that a merger occurs when two businesses join to create a new firm; an acquisition happens when one firm buys out and manages another.

What are the different kinds of mergers in companies?

There are five major kinds of mergers between companies which include conglomerate, horizontal vertical and expansion of the market and product extension. The type of merger is based mostly upon the type of industry and the connection between the two companies merging.

  • Conglomerate merger: Conglomerate mergers are the combination of two businesses with different sectors and non-related business operations. The advantages of a conglomerate merger include diversifying operations as well as cross-selling products and the reduction of risk exposure. One well-known instance of a merger between conglomerates was the time The Walt Disney Company merged with the American Broadcasting Company (ABC).
  • Horizontal merger: Horizontal mergers are the combination of two businesses in the same industry. they may comprise directly and indirectly competing companies. The advantages of a horizontal merger are increased purchasing power, greater marketing possibilities and less competition and an increased audience reach. Monroe stated that this type of merger is quite common in the restaurant business in which different brands of restaurants join forces to serve a larger audience and increase purchasing capacity from similar suppliers.

“For instance, in the year 2019 Papa Murphy’s, a company operating in the pizza industry has merged with a firm named MTY Food Group – which operates restaurants like TCBY, Cold Stone Creamery and Planet Smoothie – which will allow the new business to establish a central advertising and marketing division and franchised sales departments,” Monroe said.

Vertical merger

Vertical mergers involve the merger of two businesses which operate at various stages within the supply chain making different products as well as products or services for the same end product (e.g. that one company sells a product to the other). The advantages of a vertical combination include an improved supply chain, reduced costs and enhanced product control. One example of merger is The Walt Disney Company merged with Pixar Animation Studios for its unique animations and highly skilled employees.

Market extension merger

An extension of market merger like a horizontal merge it is the amalgamation of two businesses from the same sector, However, in this merger both companies come operating in separate markets. The principal purpose of this merger is the ability to expand and grow market share. Monroe stated that this kind of merger is usually observed with banks.

“With the government increasing regulation and the requirement for compliance by banks and other financial institutions, it is sometimes a good idea for smaller banks to combine with banks of a similar size in order to lower their operating costs and the compliance with regulations and boost their share of the market, as they all provide the identical product,” Monroe said.

Product extension merger

An product extension merger also called a generic merger is the merger of two businesses that offer similar but not necessarily competitive, products. The advantages of the product extension merger include expanding the customer base and growing profits. Monroe explained that this kind of merger is popular in the field of software where one firm may provide the virus protection program and another may offer an financial protection programs for the privacy of your financial information.

“The concept of the two companies merging is beneficial, since both products could be used by the same customers,” Monroe said. “The product merger can continually be expanded with additional services and products when a client is bought.”

The most important thing to remember is that there are five major types of mergers in a company that include conglomerate mergers and vertical mergers, horizontal mergers markets extension merging and product extensions mergers.

A few more examples of major mergers

We’ve discussed a few instances of mergers, however they’re only a small one part of the tale. The largest corporate mergers of all time could highlight the extent of these transactions and the ways that companies can gain from the process. When the mergers are this large the government is involved because the ripple results of the mergers can affect entire economies.

America Online and Time Warner

The merger was announced in the year 2000 and started an unprecedented consolidation process of Internet service providers. The time was when America Online was the largest ISP in the world however, cable providers began to realize that internet-based solutions were the way of the future. Time Warner was valued at $164 billion and one of the largest company in cable services within the United States.

The merger brought two powerful companies in one, and it was the company that developed the plan for making use of cables to speedily and significantly improve internet connectivity and performance.

Pfizer and Warner-Lambert

This is another significant merger that took place in the year 2000. In this instance both companies were within the pharmaceutical industry. At first, Warner-Lambert was planning to sell the company to a different one, American Home Products. This deal failed, and Pfizer swooped in to close an acquisition of its own.

The merger was completed for $90 billion and the two companies were able consolidate the profits for manufacturing and distribution of cholesterol medicine referred to as Lipitor.

Exxon and Mobil

The merger was announced one year before some others big mergers, which occurred in 1999. They were already two of the biggest oil refineries and distribution companies worldwide. The merger of these two companies consolidated their resources and the result was so huge that it altered the cost of crude oil for the rest of time. This was the main reason for the merger, since it allocated over 22,000 gasoline stations throughout America. U.S. You may be familiar with the resultant company, ExxonMobil, as the outcome of the merger.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.