A business merger involves two businesses legally consolidating into one. There are several reasons why you might want to consider a business merger, such as creating scale, building a stronger position for a future sale or investment or eliminating competition in a niche market. However, it is important to do your due diligence and make sure you understand the differences between a merger and an acquisition.
The legal distinction between a merger and an acquisition is the consolidation of assets and liabilities into one entity. A merger is the legal joining of two companies, resulting in the retirement of old stock and issuance of new shares. Acquisitions are generally cash transactions and involve the purchase of shares.
There are several types of business mergers, including horizontal and diversified. A horizontal merger is a combination of firms within the same industry. A diversified merger includes firms in different industries or at different stages of production. The latter allows a company to gain market extensions and diversify its customer base.
Problems can arise during and after a business merger. For example, misguided notions of synergies – ways in which a combined company is more valuable than it is individually – can lead to overpayment. Also, integrating a company’s workforces and operational processes can take time. Moreover, problems can occur if managers’ compensation is tied to profit per share, providing them with a financial incentive to buy companies and expand their empires.