A merger is an agreement that usually combines two (or more) existing companies into a new single entity. This is generally a friendly or voluntary combination of the companies involved into a new legal entity and is rarely considered a hostile takeover. Mergers can also involve the absorption of the target firm into the acquirer but because of the relative sizes of the firms involved, the deal may be considered a merger rather than an acquisition. This process often involves the exchange of acquire stock via an exchange ratio for the “target” stock.
Reasons why companies complete mergers may include but not be limited to, expanding a company’s sales network, expansion into new products/segments, or to gain market share in order to improve competitiveness. Classical types of mergers may include a horizontal merger (discussed in a stand alone article here), a vertical merger (discussed in a stand alone article here) or a conglomerate merger.
The term merger is synonymous with acquisitions although strictly speaking there are significant differences. For a more complete description and investigation between these two corporate events, please see our article Differences Between Mergers and Acquisitions Explained – with Examples.
A Merger Example
The aim of this corporate action is primarily to increase the shareholder value but numerous examples demonstrate manager ego or even actions (sometimes selfish) of a significant shareholder or activist shareholder can often play a defining role. For example, often cited as one of the worst IT mergers of all time was Hewlett Packard (HP), under the guidance of CEO Carly Fiorina, which decided to merge with Compaq in a deal valued at $25 billion dollars. Fiorina stepped down in 2005 with the company having lost half of its market value and cutting several thousand jobs. However, the company failed to learn from its mistakes and continued on a path of failed acquisitions. In his book, Barbarians in the Boardroom: Activist Investors and the battle for control of the world’s most powerful companies, Owen Walker discusses this story at length focusing on the intervention of activist investor Ralph Whitworth of Relational Investors.
This example of management hubris where senior executives seek to make a name for themselves by executing a signature deal can be contrasted with a successful merger such as Disney and Pixar. Two companies will complementary resources that when combined form a naturally successful media and entertainment company.
