Merger: What you should know about a company merger

By Katie Kabat

There are so many reasons why company mergers happen. Although it is not usually the goal of the founder of the company to eventually mix it with another, a successful business merger can be very beneficial. Here you have all the information that you need to learn must about a successful company merger.

What is a company merger?

A company merger occurs when 2 companies come together to form a new company with combined stock. A merger is typically thought of as an equal split in which each side maintains 50 % of the new company. However, in some mergers, one of the original entities could end up taking more than half of the earnings or ownership of the new company.

How does a merger work?

When a company merger happens, the two equal companies can convert their previous stocks into one new, combined company stock. First, they must decide what each company is worth, and then they split the ownership of the new company accordingly.

“For example, it may be determined that company A is worth $100 million and company B is worth $200 million, making the combined value of the new company worth $300 million,” said Terry Monroe, founder and president of American Business Brokers & Advisors. “Therefore, the stocks from each of the companies will be surrendered, and new stock will be issued in the name of the new company based on the valuation of $300 million. The stock owners from company A would get one share of stock in the new company, and stock owners from company B would get two shares of stock in the new company.”

What are the different types of company mergers?

Conglomerate merger – This is the combination of two companies form different industries and unrelated business activities. Conglomerate mergers will diversify business operations, improve cross selling products and minimise risk exposure. An example is when the Walt Disney Company merged with the American Broadcasting Company (ABC).

Horizontal Merger – This is the combination of two companies form the same industry. It can include both direct and indirect competitors. The advantages of the horizontal include greater buying power, more marketing opportunities, and less competition to reach their audience. So, this type of merger is common in the restaurant industry where different restaurant brands will merge to reach a wider audience.

Vertical Merger – This is the combination of two companies that operate in different stages of the supply chain. They produce different goods or services for the same finished products. The benefits of this include a more efficient supply chain, lower costs, and increased product control. An example of this was when the Walt Disney Company merged with Pixar for their talented employees and innovation.

Market extension Merger – Similar to the horizontal, the market extension is the combination of two companies from the same industry. However, the two companies have different markets. The main benefit from this is to expand and increase the market share. This type of merger is often seem with banks.

Product extension Merger – This is also known as a congeneric merger, the product extension is the combination of two companies that sell similar, but not exactly the same products. The products don’t compete with each other. The benefits of this merger include expanding customer reach and increasing profits. This type is very common in the software industry. One company may offer virus protection and another financial protection.

Take Away

Company mergers are often for the benefit of both companies. The profitability of the company and the stocks both can rise. So use this information to decide if a merger is right for your company.

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