A merger implies to a business deal where two existing, independent companies tend to combine in order to form a new, singular legal entity. Mergers are voluntary. Earlier, Anand Jayapalan had discussed how usually two companies of a similar size and scope merge when they both stand to gain from the transaction. Mergers take place for a myriad of reasons. They can allow a company to enter a new market, offer a new service or sell a new product. Mergers can also be useful in changing pricing models, ensuring lower tax liabilities, improving management and reducing operational expenses. Companies typically merge to increase their overall size, scale, and revenue.
Mergers can be of many types, including:
- Horizontal: Horizontal mergers take place when two companies that already offer the same services or products combine. Such mergers allow enterprises to lower the competition and gain domination in the market.
- Market extension: A market extension merger is often considered to be a form of horizontal merger that enables two companies that sell the same product to operate in a new market. Such types of mergers can help businesses to drive more revenue by expanding their business operations and reach.
- Vertical: If two companies operate within each other’s supply chain, then they can merge vertically. Examples of vertical mergers would include a home construction company purchasing a window pane manufacturer or a clothing brand buying a fabric manufacturer. Vertical mergers aid companies to lower their overall expenditure by cutting out the middleman.
- Conglomerate: A conglomerate emerges when a merger takes place between companies that operate in separate industries and have little to nothing in common from a business perspective. For instance, a clothing company combining with a snack food manufacturer. Such mergers tend to open up opportunities for cross-selling and market extensions, and can even lead to increased operational efficiencies.
- Co-generic: Co-generic mergers take place when companies that offer varied services or products combine in order to operate in the same domain and sell to the same customer base. Such types of mergers help companies to sell new products, and hence are often known as product extension mergers as well.
- SPAC: A special purpose acquisition company (SPAC) is basically a publicly traded shell company that is made with the singular intent of merging with a private company. This merger enables the private company to go public. SPACs are emerging as an increasingly popular alternative to a traditional initial public offering (IPO).
A special purpose acquisition company (SPAC) is a publicly traded shell company made with the singular intent of merging with a private company. That merger allows the private company to go public. SPACs are an increasingly popular alternative to a traditional initial public offering (IPO).
Earlier, Anand Jayapalan had spoken about how mergers are generally spearheaded and facilitated by an investment banker. They tend to source deals, value companies, forecast outcomes, and conduct due diligence on the companies involved in the transactions. Corporate lawyers also oversee M&A transactions, and ensure compliance with federal and state regulations. Mergers are typically financed through cash, equity, or a combination of both. When two companies merge, shareholders from each company receive stock in the new entity equivalent to the value of their original shares.