Mergers and Acquisitions

A merger is when two firms come together who are on roughly equal terms into one new legal company. Owners of each pre-merger firm continue as owners, and the resources of the merging entities are pooled for the benefit of the new company. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly, it is always regarded as an acquisition.

There are three types of Mergers and Acquisitions (M&A); Horizontal integration, Vertical integration and Conglomerate. Horizontal Integration is the merge of firms at the same stage of production and in the same or different industries. When the products of both firms are similar, it is a merger of competitors. When all producers of a good or service in a market merge, it is the creation of a monopoly. If only a few competitors remain, it is termed an oligopoly. This can also be called lateral integration. Vertical integration is the merge of firms at different stages of production and distribution but in the same industry. When a firm acquires its input supplier it is called backward integration, when it acquires firms in its output distribution chain it is called forward integration. For example, a vertically integrated oil firm may end up owning oilfields, refineries, tankers, trucks, and petrol stations. Conglomerate is the combination of firms with unrelated business areas but their marketing does overlap such as virgin group of companies. Such structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult.

Many businesses turn to mergers and acquisitions to obtain synergy because two firms combined are worth more than the value of the firms apart. Companies will gain market power and monopoly gains due to the...