What is a Merger?
A merger is a fundamental aspect of corporate strategy, finance and management; the process deals involves the buying, selling and combining of different companies to aid in the growth or financing of the involved business organizations. When a company merges with another, it does so to increase its market presence within a given industry. In essence, the companies who merge together join forces; they pool their resources, including their human capital, to increase efficiency in a given market place. Furthermore, a merger may also be conducted to increase specialization or aid in financing of a struggling, yet valuable company.
Difference between Mergers and Acquisitions:
Although mergers are often used synonymously with acquisitions, the two actions produce slightly different results. When one business takes over another and clearly establishes itself as the controller or new owner, the maneuver is referred to as an acquisition. From a legal point of view, the purchased company no longer exists; the buyer, in the acquisition assumes control over the company and swallows the business. In this maneuver, the buyer’s stock remains active and continues to be traded while the purchased company’s shares transfer over to the buying company.
Benefits of Mergers:
The basic rationale used to explain mergers is that the acquiring company seeks to improve their financial performance. The following reasons provide brief explanations as to why a company would partake in a merger:
• Economies of Scale: The combined company can reduce its fixed costs by removing duplicate operations or departments; by lowering the costs of the companies, relative to a fixed revenue stream, the companies will enjoy increased profit margins
• Increased Revenue and Market Share: The buyer in a merger absorbs a competitor and thus increases its market power
• Taxation: A profitable business may buy a defunct company to use the acquired firm’s losses to their advantage by reducing their tax liability.