What is a Merger and How Do they Work?

Not to be confused with an acquisition, a merger occurs when two or more companies decide to join forces and form an entirely new company. It’s not a hostile corporate takeover; rather, it’s a mutual agreement from which all parties benefit. By “merging” their operations, companies can eliminate competition, grow their business and more. To learn more about what is a merger and how they work, continue reading.

What is a Merger – The Basics

How Mergers Work

A corporate merger is the result of two or more companies “merging” together; thus, forming a new company. Normally, this happens when at least one party identifies a benefit in the merger, at which point they begin negotiations with the other company. If the other company also believes the merger is beneficial — both for their short-term and long-term goals — they may choose to proceed.

Regarding equity, mergers don’t treat all merged parties equally. In other words, a single share of company A’s stock might be worth more or less than a single share of company B’s stock. These nuances in equity are typically handled by a ratio (e.g. one share of company A’s stock is equal to 1.5 shares of company B’s stock).

Of course, equity shares is only one of many concerns that must be dealt. From start to finish, a typical corporate merger can take anywhere from six months to two years. It’s a time consuming and laborious task to say the least. However, there are still some key benefits associated with the process, which is why so many companies choose to merge.

Benefits of Corporate Mergers

So, what benefits does a corporate merger offer? The single most notable benefit is cost-savings, which usually comes from several different things. Merged companies, for instance, can share office space; thus, reducing overhead and associated costs. Merged companies may also layoff redundant positions (.e.g multiple workers sharing the same role), further reducing the cost of their collectively operations.

There’s also the benefit of diversification when two or more companies merge. Perhaps company A dominates one niche, whereas company B dominates a separate niche. The merger allows the newly formed company to offer products and/or services for both niches.

Hopefully, this gives you a better understanding of corporate mergers and how they work.

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