April 23rd, 2023
April 23rd, 2023
There many different ways businesses can work together to become more successful and corner the market, beating out the competition. For businesses that want to make a major change, they can engage in a business merger wherein two businesses merge to become one. This guide will explore the intricacies of the business merger, the forms they may take, and the advantages and disadvantages of choosing to do a merger. To see a comprehensive guide comparing and contrasting all of the most popular forms of business partnerships, see the guide Working Together: A Comprehensive Guide to Business Collaborations.
A business merger, created using a Business Merger Agreement, is one of the most formal and permanent ways for two companies to collaborate with each other. A merger is a legal agreement between two companies to combine and become one single company. The agreement between the companies differs on a case by case basis, but the ultimate goal of every merger is to create a new entity that is stronger than the two individual parts were on their own.
Companies choose to merge for a variety of reasons. Mergers can expand a company's customer base, increase their market value, or fill gaps in their production capabilities. In a merger, the shareholders of the individual companies become shareholders in the newly merged company, and, ideally, the value of their shares increases during and after the merger. Companies often merge to become more competitive. For example, the second and third highest-grossing brands of bottled water might decide to merge into one company to successfully compete with the brand in first place.
Example: The company Anheuser-Busch InBev is the result of multiple mergers in the beer market. The newly named company is the result of a merger between three large international beverage companies: Interbrew, Ambev, and Anheuser-Busch. Ambev merged with Interbrew, which united the third and fifth largest beer brewers in the world. This resulting company then merged with Anheuser-Busch, a merger of the first and second-largest brewers in the world. This merger created an unbeatable force in the beverage market and extended the international reach of all of the combined company's brands.
Mergers and acquisitions involve similar concepts and considerations but have several important differences. An acquisition, accomplished by using a Business Sale Agreement, involves one company buying the entirety of another company and assimilating its assets. The acquired company becomes part of the acquiring company and loses its identity entirely. The acquiring company typically buys out the other company's outstanding stock to complete the transaction. By contrast, with a merger, two businesses join together and cease to exist as individual entities in the process. Instead of retaining their unique identities, they create a new name and brand that includes elements of both of the original companies. Mergers are designed to be mutually beneficial and increase the overall value of the companies by becoming one. Most mergers involve companies that are of a relatively similar size and have similar values and customer bases.
The two main types of mergers are horizontal mergers and vertical mergers. With a horizontal merger, two companies that operate in the same industry and market space merge to become one. Frequently, a horizontal merger involves two competitors who choose to join forces to beat their other competition. In an industry with fewer brands, companies that provide the same products or services might find it mutually profitable to merge. Creating a new company with a larger target market and more resources can significantly increase shareholder value in this instance. An example of a horizontal merger would be two car manufacturers who merge to outsell their competitors. A horizontal merger would involve rebranding, a revision of company policies, and a redesign of the facilities.
In a vertical merger, companies that operate at different stages of a production chain combine to increase their efficiency. These companies likely produce different parts or services that contribute to one finished product. A vertical merger is most profitable when both companies create one company that shares their equipment, staff, and facilities for increased productivity and efficiency. A vertical merger can reduce production costs, streamline product development, and decrease waste. An example of a vertical merger would be an email provider that merges with a media conglomerate. This deal would centralize communication, consolidate marketing efforts, and create a more cohesive and comprehensive brand.
Mergers are heavily scrutinized by the Department of Justice and Federal Trade Commission. These agencies decide whether a merger is legal. Without their blessing, companies cannot combine, regardless of the reason. They publish a set of guidelines to help regulators decide whether a merger is legal. The aim of this process is to protect consumers from illegal pricing and make sure there is a variety of businesses in the marketplace rather than large monopolies controlling different industries.
The two agencies conduct economic reviews of market conditions and the entire field of competition to understand the potential influence of the proposed merger. They also look at whether the new company would be in a position to have undue influence on competitors or be able to manipulate prices in a way that could harm consumers.
It often makes sense for two companies to merge to avoid duplication. For example, if two bus companies are competing over the same stretch of roads, they could both best be served by joining their efforts and becoming one company that serves that market rather than duplicating their services. Consumers then benefit from a single business with lower costs. Mergers are also advantageous for companies that may have a good product or process, but have been poorly managed or economically depressed and are in danger of going out of business. By merging with a larger and more stable company, the weaker company is able to survive in its reconfigured form and can save its employees' jobs and its shareholders' investments.
There can also be significant downsides to business mergers, primarily for consumers. A merger can reduce competition and give the new company monopoly power. With less competition and greater market share, the new company is then able to increase the prices for consumers while decreasing the choices available to them. A merger, depending on how it is structured, can also lead to job losses. This is of particular concern for weaker companies merging with stronger companies. Finally, a new merger that results in a larger company may lack the same degree of control and struggle to motivate its workers. Further, if the two original companies had little in common, then it may be difficult for them to achieve synergy with the newly merged company.
For companies who want to establish the most formal sort of collaborative business relationship, a business merger can often be the best choice. Though getting into business means taking on the competition, businesses are often the most successful when they are able to work together.
About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.