It refers to a situation when two or more existing firms combine together and form a new entity. Or a merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merger are roughly equal in terms of size, customer, scale of operations, etc. for this reason, the term ‘’ merger of equal’’ is sometimes used.
Type of merger
There are five types of company merger;
This is a merger between two or more companies engaged in unrelated business activities. The firm may operate in different industries or in different geographical regions. A pure conglomerate involves two firms that have nothing in common.
A conglomerate merger was formed when the Walt Disney company merged with the American broadcasting company ( ABC ) IN 1995.
A congeneric merger is also known as a product extension merger. It occurs when two or more companies operate in the same market or sector with overlapping factors, such as technology marketing, and production processes, research, and development join to form a new business entity.
An example of a congeneric merger is Citigroup’s 1998 union with travelers insurance, two companies with complementing products.
(3). Market extension:
This type of merger occurs between companies that sell the same products but compete in different markets. Companies that engage in the market extension merger seek to gain access to a bigger market and, a bigger client base. To extend their markets.
Example: eagle Bancshares and RBC Centura merged in 2002.
A horizontal merger occurs between companies in the same industries. The merger is typically part of consolidation between two or more competitors offering the same products or services.
Example: the 1998 merger of Daimler-Benz and Crysler is considered as a horizontal merger.
When two companies produce parts or services for a specific finished product merge, the union is referred to as a vertical merger. A vertical, merger occurs when two companies operate at different levels within the same industries supply chain combine their operation.
Example of a vertical merger took place in 2000 when an internet provider America Online (AOL) combined with media conglomerate Tim warner.
If a new company incorporated then it is called consolidation or amalgamation.
If an existing company is merged into another existing company it is known as absorption.
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The acquisition is a situation whereby one company purchases most or all of another’s share in order to take control. An acquisition occurs when a buying company obtains more than 50% ownership in the target company.
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of business.
- It also known as a takeover or a buyout
- It is the buying of one company by another.
- In acquisition two companies combine together to form a new company altogether.
Example: Company A + Company B = Company A.
Process of merger and acquisition in India
The process of merger and acquisition has the following steps:
- Approval of the board of directors.
- Information to the stock exchange.
- Application in the high court.
- Shareholders and credit meetings.
- Sanction by the high court.
- Transfer of assets or liabilities.
- Payment by cash and securities
Maximum waiting period 210 days from the filing of notice ( or the order of the commission – whichever earlier ).
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Friendly and hostile acquisition
1). Friendly acquisition :
A friendly takeover is where the target company agrees to the acquisition offer in a peaceful manner and in this case, the takeover is subject to the approval of the shareholders of the target, company as well as that the regulators to check if the deal complies with the antitrust laws. Friendly acquisition often work towards a mutual benefit for both the acquiring and target companies.
2). Hostile takeover:
In a hostile takeover, the target company doesn’t want the acquirer to acquire it.
When the takeover is without the consent of the board of directors of the target company. It is hostile on the board of the directors of the target company then the takeover is called ‘’hostile takeover’’.
Difference between acquisition and merger
|1||Merging of two organizations into one.||Buying one organization by another.|
|2||It is a mutual decision.||It can be a friendly takeover of hostile another.|
|3||The merger is expensive than acquisition (higher legal cost).||The acquisition is less expensive than a merger.|
|4||Through merger, shareholders can increase their net worth.||Buyers can not raise enough capital.|
|5||It is time-consuming and the company has to maintain so many legal issues.||It is a faster and easier transaction.|
|6||Dilution of ownership occurs in the merger||The acquirer does not experience the dilution of ownership.|