What is a merger in business, and why should you be bothered about it? Well, as a business owner, you can never fully project your business’s direction. However, running and scaling your business may be difficult without turning to external forces.
While there are several ways to enlist the help of external forces in your business, you may have to consider a more direct approach at some point, like a merger.
This is why you need to know the meaning of this business term and all it entails.
So, if you ever have to consider it for your business, you will have all the knowledge to help you do so effectively.
Or perhaps you are already considering it and trying to learn all you can about it.
Regardless of the situation, you are in the right place, and this is specifically for you.
Here, you will also learn several other important things about business mergers- Including their types and the difference between merger and acquisition.
You will see a real-life example and even how you can carry out a successful merger for your business.
So, ensure you read this article to the end.
Meaning of a Merger in Business – What is a Merger in Business
Merger refers to the business process of merging two separate business entities to become one.
It is a business strategy that allows a company to merge with another company and become one entity.
Usually, for this to happen, the companies merging have to be on the same level regarding their scope and size.
This is why sometimes, instead of just a merger, some people may use the phrase “merger of equals” to refer to this business process.
Mergers are often voluntary and beneficial to both companies involved.
Reasons Why Mergers Happen – What is a Merger in Business
Mergers benefit businesses looking to enter new markets or offer new services or products.
This business process can also help the company’s shareholders.
When two firms merge, the shareholders of the existing companies will get the new company’s shares.
Businesses can also use mergers to reduce their operational costs or to reduce their tax liabilities.
For instance, a company’s taxable income is substantial, and it can reduce its tax liability by merging with a company with a significant Net Operating Loss (NOL).
Companies also get into a merger to improve management.
Mergers can help companies plan better and use their financial resources better.
Another reason why companies may decide to merge is to get assets that they cannot develop internally or will take too much time without the merger.
Mergers can also help companies reduce their advertising and marketing costs.
By merging with a competitor, both businesses can eliminate their competition.
The reduction in advertising and marketing costs will reflect in the prices of their goods and services.
This would benefit their customers, which will help drive up sales.
So, these are some of the reasons businesses go into mergers.
However, the major reason businesses merge is to increase their revenue, size, and scale.
In other words, companies merge to make more money.
Types of Business Merger – What is a Merger in Business
There are several types of business mergers, as there are several reasons businesses go into mergers.
The reason the business is going into the merger determines the type of merger it would create.
This is why you need to know about the different types of business mergers.
This way, you will be able to make an informed decision if the need ever comes up.
With that said, here are 5 types of business mergers.
A conglomerate merger is between 2 or even more companies that are into different types of businesses.
The businesses that come together to make up a conglomerate could run in different geographical locations or industries.
Under this type of business merger, you have the pure and mixed conglomerate.
Pure conglomerates are made up of two different companies that do not have anything in common.
On the flip side, mixed conglomerates happen between companies with different types of business activities but are looking to gain new markets or product extensions via a merger.
Before businesses go into a conglomerate merger, the original shareholders must see that the merger will benefit the companies when it comes to saving costs and enhancing performance and value.
A good example of a successful conglomerate merger is the merger between eBay and PayPal, which happened in 2002.
Market extension mergers happen when companies that offer the same products but operate in different markets merge.
The reason for this type of merger is to increase companies’ market reach, thereby increasing their customer base.
In 2002, RBC Centura and Eagle Bancshares merged; this is one of the most successful real-life examples of a market extension merger.
This type of business merger is otherwise called a Product Extension merger.
This is because businesses often use this merger to extend their product line.
Congeneric mergers often occur between two or more businesses that belong to the same sector or market and have similar factors like marketing, technology, research and development, and production processes.
When this merger occurs, a new product will be added from one of the businesses to the other company’s current product line.
Not only will this merger help the companies extend their product line, but it will also give them a wider customer base.
A good congeneric merger example is the merger between Broadcom and Mobilink Telecom Inc. in 2002.
Both companies were both in the electronic industry, and merging helped them combine their technologies to improve their product.
Horizontal mergers happen between businesses that operate within the same niche or industry.
The companies in a horizontal merger would typically be competitors that offer the same services or products.
Therefore, a horizontal merger consolidates the companies and eliminates competition.
You would find this merger more in business with a few firms.
This is because the competition between fewer companies is usually higher.
So, merging will help create larger businesses with a more significant market share.
The Exxon and Mobil merger is a good example of a horizontal merger.
Vertical mergers occur between two companies operating within the same industry but at different stages of the supply chain.
When two companies like this combine operations, that merger will be considered a vertical one.
Vertical mergers make it possible for companies to reduce their production costs since the companies involved in producing the service or product will combine their processes.
A good vertical merger example is the 2000 merger between America Online (AOL) and Time Warner.
Merger Versus Acquisition – What is Merger in Business
Sometimes, you would also hear the word “acquisition” when the topic merger is being discussed.
Some people even use the umbrella term “merger and acquisition” M&A when referring to these business processes.
However, while both of these words refer to the process of combining 2 or even more companies, they are different, and you should distinguish one from the other.
The big question on your mind now is, “how are they different?”.
Well, let’s answer that by taking a closer look at these terms.
You already have a clear understanding of what a merger is; when two different business entities form a partnership to become a joint company.
An acquisition, on the other hand, is more direct.
With an acquisition, a typically larger business entity buys another company and takes over everything about it.
With a merger, the combination of the companies often results in the emergence of a new joint company.
But this isn’t the case with an acquisition.
Rather than a new company emerging, the smaller company gets absorbed into the company that buys it and stops to exist.
It becomes a part or an asset of the larger organization that buys it.
An acquisition is seen as a hostile version of a merger; acquisitions are sometimes called takeovers.
While this may not always be the case, most acquisitions are sometimes quite hostile.
They can even be involuntary in some cases.
Because of this negative connotation attached to acquisitions, most companies will instead use the word “merger” when they acquire another company.
This has further made the distinction between these business processes blurrier.
Despite this, several ways exist to distinguish an acquisition from a merger.
Differences Between a Merger and an Acquisition – What is a Merger in Business
Because the line that differentiates a merger from an acquisition keeps getting blurrier, it is relevant that you have full knowledge of how these processes are different.
This section will dig deep into that.
Mergers and acquisitions are different in the following aspects;
From their definition, you can clearly tell between a merger and an acquisition.
A merger means combining two different companies to become one company
On the other hand, an acquisition is all about a bigger firm buying a smaller company and then absorbing it into itself.
Mergers and acquisitions are often carried out after careful strategic planning and discussion.
However, the decision to merge is often mutual between the companies involved.
Unfortunately, this is not always the case with acquisitions.
The larger company often has all the power and would absorb the smaller company into itself and run it however it deems fit.
This is why the terms in both processes are quite different.
A merger would have a more friendly term.
The terms of an acquisition may be hostile and even involuntary in some cases.
And even after the acquisition, the atmosphere in the organization can be hostile.
Power – What is a Merger in Business
A merger typically occurs between two or more companies that are equal in terms of operational scale and size.
These companies will then decide to come together and become one.
Therefore, in the case of a merger, there is usually no power difference between the companies, but an acquisition isn’t like this.
Acquisitions are usually between a larger company and a smaller one.
Therefore, the acquiring business has more power and would dictate the terms of the acquisition as it sees fit.
Stocks – What is a Merger in Business
A business merger often results in the issuance of new stocks.
Oftentimes, the new company that comes as a result of the merger will have a new name.
But with an acquisition, there’s no name change, and new stocks aren’t issued either.
The smaller company will simply become an asset for the bigger company and will stop existing.
The legal formalities and work required to carry out a merger are more than what is needed for acquisition.
The reason for this is that a merger often leads to the formation of a new business entity.
Whereas, this isn’t the case with an acquisition.
An acquisition is about buying another company, so it only requires a little paperwork or legal formalities.
Tips to Make a Merger Successful for Your Small Business – What is a Merger in Business
If you are a small business owner considering a merger for your business, you need to make sure you do everything right to make the merger successful.
Luckily, these tips will help you with all that.
Check Your Company’s Financial Health
You are excited about this new step for your business and want to dive right into it.
Take your time because your first step is ensuring your business is financially healthy to take on this venture.
You need to be sure that your business has the financial capacity to undertake a merger.
The only way you can do this is by conducting a thorough financial check.
Review your financial statements, balance sheets, and other accounting records.
You need enough liquidity if you are going to pull off the merger successfully.
Once you know your financial health and liquidity, you can take the next step.
Outline your Success Metrics and Goals
You can’t just go into a merger just for the fun of it.
There must be a goal or an objective you are looking to achieve from the merger.
Now, you have to define and outline these objectives and goals.
You also want to figure out what your success factors are; what do you have to achieve to consider the merger a success?
Having these in your mind will help you make the best decisions during the merger process.
This way, you can choose the best candidate to help you achieve your goals.
It will also enable you to choose the best type of merger to help you achieve your goals.
Do Your Due Diligence
When carrying out a successful business merger, you cannot undermine the importance of due diligence.
It would be unwise to merge your business without ensuring that the company has the values you expect them to have.
At this point, you need to do your due diligence to check the potential merger company’s financial health and other aspects of the business.
This is important because it may make or break the merger.
You can hire a professional accountant to conduct a proper financial check on the company you want to merge with.
Decide on Important Factors of the New Company
Because two companies will now be one, you need to decide on certain factors for the new company.
A major factor, in this case, is the company’s leadership.
Both companies will have to come up with a mutually beneficial leadership structure.
Another important thing to consider is the new company’s branding.
Will it keep one of the original company’s brandings?
Will it be a combination of the two?
Or will it develop its brand altogether?
These are just two important factors to discuss during the merging process.
You should consider and discuss any factor that may pose any problem after the merger process has been finalized.
Ensure Transparency Throughout the Process
If you decide to merge your company with another, you need to consider your employees when taking this decision.
This is not to say that you should not do what’s best for your company.
You should be open to your employees about the latest development.
You do not need to tell them everything about the process, but ensure you carry them along.
After all, it is their livelihood on the line, and surprising them just like that won’t do.
Reassure key employees that the process is for the company’s good and be transparent with them at every step.
If the merger will affect your employees in any way, be sure to tell them about this.
Not only will doing this reassure your employees, but it will also reduce the chances of resistance to the change post-merger.
Conclusion on What is a Merger in Business
Merging your business with another business can be one of the best things you can do for your small business.
But before you go into a business merger, you need to ask yourself the reason you want to do it.
You should not just go into a merger for the fun of it.
Your reason should be beneficial to your business and you as the business owner.
This is the best way to ensure you do something that will not harm your business.
If you are sure that a business merger is what your business needs, follow the tips shared in this article.
Carrying out a business merger is excellent.
But carrying out a successful business merger that reaps the desired results is even better.
All the best!