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When two or more companies consolidate by exchanging common stock, and the resulting single company replaces the old companies, the consolidation is described as a merger.
The shareholders of the old companies receive prorated shares in the new company. A merger is typically a tax-free transaction, meaning that shareholders owe no capital gains or lost taxes on the stock that is being exchanged.
A merger is different from an acquisition, in which one company purchases, or takes over, the assets of another. The acquiring company continues to function and the acquired company ceases to exist. Shareholders of the acquired company receive shares in the new company in exchange for their old shares.
Despite their differences, mergers and acquisitions are invariably linked, often simply described as M&As.
amalgamationthe combining together of two or more firms into a single business on a basis that is mutually agreed by the firms' managements and approved by their shareholders. Mergers are one form of EXTERNAL GROWTH involving firms in expanding in a horizontal, vertical or conglomerate direction:
- Horizontal mergers (mergers between firms in the same market) may enable the firms to lower their costs, by taking advantage of the economies of large-scale production and marketing and by increasing the market share of the combined group, thereby putting it on a stronger competitive footing (see HORIZONTAL INTEGRATION);
- Vertical mergers (mergers between firms operating at different levels in the same market) may enable the firms to lower their costs by combining together in one operation a number of sequentially linked processes and by cutting stockholding costs, while control of inputs and market outlets gives the firm greater security of supplies and access to distribution channels, often at a competitive advantage over non-integrated rivals (see VERTICAL INTEGRATION);
- Conglomerate mergers (mergers between firms engaged in unrelated markets) enable risk to be spread, and provide an opportunity to develop better the resources of each by cross-transference of management, production and marketing expertise and by the targeting of finance to areas of growth potential (see DIVERSIFICATION).
In terms of their wider impact on the functioning of market processes, mergers may, on the one hand, promote greater efficiency in resource use and lower market costs and prices, or, on the other hand, reduce competition and heighten the dangers of monopolistic control over markets. Thus they may simultaneously involve both benefits and detriments. For this reason, in the UK, under the FAIR TRADING ACT, 1973, mergers and TAKEOVERS which create or extend a firm's market share of a particular product in excess of 25%, or where the value of assets combined is over £70 million, can be referred by the OFFICE OF FAIR TRADING to the COMPETITION COMMISSION to determine whether or not they are in the public interest. See MARKET ENTRY, BARRIERS TO ENTRY, CITY CODE ON TAKEOVERS AND MERGERS, DEMERGER, BUSINESS STRATEGY, MERCHANT BANK.
amalgamationthe combining together of two or more firms. Unlike a TAKEOVER, which involves one firm mounting a ‘hostile’ TAKEOVER BID for the other firm without the agreement of the victim firm's management, a merger is usually concluded by mutual agreement. Three broad categories of merger may be identified:
- horizontal mergers between firms that are direct competitors in the same market;
- vertical mergers between firms that stand in a supplier-customer relationship;
- conglomerate mergers between firms that operate in unrelated markets and are seeking to diversify their activities.
From the firm's point of view, a merger may be advantageous because it may enable the firm to reduce production and distribution costs, enable it to expand its existing activities or move into new areas, or remove unwanted competition and increase its market power.
In terms of their wider impact on the operation of market processes, mergers may, on the one hand, promote greater efficiency in resource use or, on the other hand, by reducing competition, lead to a less efficient allocation of resources.
Usually, any benefit that comes from a merger will depend upon the achievement of greater efficiency in some branch of the enlarged firm's operations. Several important sources of greater efficiency may be distinguished. Horizontal mergers frequently allow firms to secure low-cost operation by realizing ECONOMIES OF SCALE in manufacture and distribution and RATIONALIZATION opportunities. In addition, the combined organization may have access to superior technical know-how and financial resources previously available to only one of the firms. Vertical mergers may make possible benefits in efficiency of production by making possible more comprehensive production planning, particularly where successive processes are closely linked, and permit economies in stock holding and distribution of goods. Conglomerate mergers may yield economies in overheads (finance, administration and marketing expenditure) and may lead to an important cross-fertilization of ideas and attitudes, particularly where the acquiring company is notably well managed and cost-conscious.
While mergers may result in greater efficiency, thereby enhancing consumer welfare, they may also serve to increase MONOPOLY power. This is most clearly seen in the case of horizontal and vertical mergers. Horizontal mergers prima facie increase the level of SELLER CONCENTRATION in the market by reducing the number of independent sources of supply. Where the merging firms are already substantial suppliers, this may reduce effective competition and permit the enlarged group more control over the market and discretion over prices. A vertical merger can produce an increase in market power in a variety of ways. If a customer firm, for example, takes over a supplier, and if the supplier is large in relation to other suppliers, other (non-integrated) customers may find themselves forced to buy from the merged supplier and then sell their products in competition with the merged customer firm. This puts the merged group in a powerful position to discriminate in prices and availability of supplies and so ‘squeeze’ the profits of other non-integrated suppliers. Superficially, conglomerate mergers appear to have little relevance to the monopoly power issue, but it is to be noted that the conglomerate may have an opportunity to affect the state of competition in a number of separate markets, by internal transfers of resources, and thus to exercise a larger degree of market power against rival companies than its market share in individual markets would otherwise permit.
In sum, mergers may involve, simultaneously, both benefits and detriments. In the UK, under the FAIR TRADING ACT 1973, mergers that create or extend a firm's market share of a particular product in excess of 25%, or where the value of assets acquired is over £70 million, can be referred by the OFFICE OF FAIR TRADING to the COMPETITION COMMISSION to determine whether or not it is in the public interest. See also COMPETITION POLICY (UK), COMPETITION POLICY (EU), WILLIAMSON TRADEOFF MODEL, HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, DIVERSIFICATION, CITY CODE, DEMERGER.
(1) With regard to corporations,a legal joining together of two or more corporations into one entity or an entity with common ownership. A horizontal merger occurs between or among competitors,and a vertical merger occurs when suppliers, shippers, retailers, and such in a common industry join together. (2) With regard to real estate: (a) The joining of two or more interests in real estate into one owner, so that the separate interests,or estates,disappear. If a property owner with a right-of-way easement over her neighbor's land then purchases the neighbor's land, the easement is extinguished. If she then sells her first property to another, the new owner cannot now claim the benefit of the old right-of-way easement, because it was merged into land ownership. (b) The concept that a real estate contract becomes merged into the deed, so that provisions in the contract, but not in the deed, are not enforceable. This is almost always a question of intent, which means a jury gets to decide. The better course is to specify in the contract that all representations and warranties and all promises and agreements survive the deed. (c) The concept that negotiations are merged into a final contract and cannot be used to vary the terms of the contract.