What Is a Merger?

What Is a Merger?

Let me tell you directly: a merger is an agreement that brings together two existing companies into one new legal entity, usually to boost market share, cut costs, or enter new markets.

You should know that mergers come in various types, and companies pursue them for reasons like expanding reach, entering new segments, or increasing market share—all aimed at boosting shareholder value. Often, during these deals, there's a no-shop clause to block other potential buyers or mergers.

How a Merger Works

Understand this: a merger is the voluntary combination of two companies on roughly equal footing into a single new legal entity. The companies involved are similar in size, customer base, and operational scale, which is why it's sometimes called a 'merger of equals.' This contrasts with acquisitions, where one company actively buys another, and it's not always voluntary.

Companies merge primarily to gain market share, lower operating costs, enter new territories, combine products, increase revenues, and boost profits—all of which benefit shareholders. After the merger, shares in the new company go to the existing shareholders of both original firms.

Types of Mergers

There are different types of mergers based on the companies' objectives, and they're common in sectors like technology, healthcare, retail, and finance. I'll walk you through the main ones without overcomplicating it.

Conglomerate Merger

This type involves two or more companies in unrelated business activities, possibly in different industries or regions. A pure conglomerate has no common factors, while a mixed one seeks product or market extensions. These only happen if they create synergy, like better value, performance, or cost savings. For example, The Walt Disney Company merged with ABC in 1995 to form a conglomerate.

Congeneric Merger

Also called a product extension merger, this combines companies in the same market or sector with overlapping elements like technology, marketing, production, or R&D. It allows adding a new product line to an existing one, accessing more consumers and a larger market share. Citigroup's 1998 merger with Travelers Insurance is a clear case of this.

Market Extension Merger

Here, companies selling the same products but in different markets merge to access a bigger market and client base. Eagle Bancshares and RBC Centura merged in 2002 to extend their markets this way.

Horizontal Merger

This occurs between competitors in the same industry offering similar products or services, often to consolidate and create a larger business with more market share and economies of scale. It's common in industries with few players where competition is intense. The 1998 Daimler-Benz and Chrysler merger exemplifies this.

Vertical Merger

When companies at different levels of the same supply chain merge, it's a vertical merger, aimed at increasing synergies through cost reductions. America Online and Time Warner's 2000 combination is a famous example.

Examples of Mergers

Take Anheuser-Busch InBev as a prime illustration of how mergers build giants. It resulted from multiple mergers involving Interbrew, Ambev, and Anheuser-Busch, combining top brewers globally through horizontal and market extension strategies.

History's largest mergers exceed $100 billion, like Vodafone's $190 billion acquisition of Mannesmann in 2000, AOL-Time Warner's $164 billion vertical merger (a notable flop), and Verizon's $130 billion buyout of Vodafone's stake in 2014.

What Is a Horizontal Merger?

Simply put, it's when competing companies selling the same products or services merge, like T-Mobile and Sprint. In contrast, a vertical merger involves companies with different products, such as AT&T and Time Warner.

What Is an SPAC Merger?

This happens when a publicly traded special-purpose acquisition company (SPAC) raises capital via public markets to buy an operating company, which then merges and becomes publicly listed.

What Is a Reverse Merger?

Known as a reverse takeover, it's when a private company buys a publicly traded one, like the NYSE's 2006 reverse merger with Archipelago Holdings.

The Bottom Line

Mergers happen when two or more companies join to form a larger entity, typically for strategic reasons like gaining market share or other advantages that benefit both sides.