A merger describes a scenario where two companies unite, and one of the companies ceases to exist after becoming absorbed by the other. The boards of directors of both companies must first secure approval from their respective shareholder bases. An acquisition occurs when one company the acquirer obtains a majority stake in the target firm, which incidentally retains its name and legal structure. For example, after Amazon acquired Whole Foods in , the latter company maintained its name and continued executing its business model, as usual.
A consolidation results in the creation of an entirely new company, where the stockholders of both companies approve of the consolidation and receive common equity shares in the newly formed entity.
For example, in , Harris Corp. A tender offer describes a public takeover bid, where an acquiring company a. The acquiring company bypasses the target company's management and board of directors, which may or may not approve of the deal. The acquisition of assets occurs when one company acquires the assets of another, with the approval of the target entity's shareholders.
This type of event often occurs in cases of bankruptcy, where acquiring companies bid on various assets of the liquidating company.
In management acquisitions, which are sometimes referred to as management-led buyouts MBOs , executives of a company buy a controlling stake in another company, in order to de-list it from an exchange and make it private.
But for management acquisitions to occur, a majority of a company's shareholders must approve of the transaction. Companies merge with or acquire other companies for a host of reasons, including:. By combining business activities, overall performance efficiency tends to increase and across-the-board costs tend to drop, due to the fact that each company leverages off of the other company's strengths. Mergers can give the acquiring company an opportunity to grow market share without doing significant heavy lifting.
Instead, acquirers simply buy a competitor's business for a certain price, in what is usually referred to as a horizontal merger. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller outfit to produce more beer and increase its sales to brand-loyal customers. By buying out one of its suppliers or distributors, a business can eliminate an entire tier of costs.
Specifically, buying out a supplier, which is known as a vertical merger, lets a company save on the margins the supplier was previously adding to its costs. And by buying out a distributor, a company often gains the ability to ship out products at a lower cost. On the downside, a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower, in response to the company paying too much for the target company.
Whole Foods Market. In the business world, companies are bound to compete with one another to stay on top. However, there are always business entities that are more successful than others. The other businesses continue on their way and grab any opportunity they can to succeed. One of those opportunities includes business merger and acquisition. But why do American businesses, including those in Indiana, consider mergers and acquisitions?
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. Although the creation of a brand-new stock with the new entity is ideal in theory, it is not always what happens.
In fact, oftentimes, when two companies merge, one company chooses to buy the other company's common stock from its shareholders in exchange for its own stock. Key takeaway: When entities merge, both companies can convert their current stock into one new stock and divide it among the new owners based on previous worth. Mergers and acquisitions are often confused as interchangeable terms, but there are a few differences. Although both involve combining two entities, an acquisition is when one company buys and controls the other, whereas a merger is when two companies come together to form a new entity.
Since an acquisition, or a takeover, involves one company consuming the other, the leadership in both companies often stays the same. Mergers, on the other hand, frequently involve the restructuring of corporate leadership, which can cause problems when both companies have headstrong leaders with different ideas on how to run the new organization. For example, you will likely have to decide which CEO or president of the two merging companies will run the newly merged company.
Although some merging companies attempt to have the CEOs of both companies share leadership through a co-CEO structure, this strategy rarely works out well, Monroe said.
This is something business leaders should keep in mind when considering mergers versus acquisitions. Key takeaway: A merger is when two companies combine to form one new company; an acquisition is when one company buys out and controls another company.
There are five main types of company mergers: conglomerate, horizontal, vertical, market extension and product extension. The merger type is based primarily on the industry and the business relationship between the two merging companies.
A conglomerate merger is the combination of two companies from different industries and unrelated business activities.
The benefits of a conglomerate merger include diversifying business operations, cross-selling products and minimizing risk exposure. A horizontal merger is the combination of two companies from the same industry; these companies can include direct and indirect competitors.
The benefits of a horizontal merger include greater buying power, more marketing opportunities, less competition and a larger audience reach.
Monroe said this type of merger is common in the restaurant industry, where different brands of restaurants merge to reach a wider customer base and gain greater buying power from the same vendors. A vertical merger is the combination of two companies that operate in different stages of the same supply chain, producing different goods or services for the same finished product e. The benefits of a vertical merger include a more efficient supply chain, lower costs and increased product control.
An example of this type of merger is when The Walt Disney Company merged with Pixar Animation Studios for its innovative animations and talented employees.
A market extension merger, similar to a horizontal merger, is the combination of two companies from the same industry; however, in this merger, the two companies are from separate markets. The primary benefit of this merger is to expand and increase market share. Monroe said this type of merger is commonly seen with banks. A product extension merger, also known as a congeneric merger, is the combination of two companies that sell similar, but not necessarily competing, products.
The benefits of a product extension merger are expanding customer reach and increasing profits. Monroe said this type of merger is very common in the software industry, where one company may offer a virus protection software and another company may offer financial protection software for your personal financial data. Key takeaway: There are five main types of company mergers: conglomerate mergers, horizontal mergers, vertical mergers, market extension mergers and product extension mergers.
We've covered a few examples of mergers, but they only tell part of the story. Some of the largest corporate mergers in history can highlight the scope of these deals and what companies stand to benefit from going through the process. When mergers reach this scale, governments get involved, as the rippling effects of the merger can shake up entire economies.
This merger happened in and began the massive consolidation of internet service providers.
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