A merger occurs when two companies combine to form a single company. It is very similar to an acquisition or takeover, except that the existing stockholders of both companies involved retain a shared interest in the new corporation. By contrast, in an acquisition one company purchases a bulk of a second company's stock, creating an uneven balance of ownership in the new combined company.
The entire merger process is usually kept secret from the general public, and often from the majority of the employees at the involved companies. Since the majority of attempts do not succeed, and most are kept secret, it is difficult to estimate how many potential mergers occur in a given year. It is likely that the number is very high, however, given the amount of successful ones and their desirability for many companies.
There are a number of reasons by two companies may want to merge, some of which are beneficial to the shareholders and some of which are not. One reason, for example, is to combine a very profitable company with a losing company in order to use the losses as a tax write-off to offset the profits, while expanding the corporation as a whole.
Increasing a company's market share is another major use of the merger, particularly among large corporations. By joining with major competitors, a company can come to dominate the market it competes in, giving it a freer hand with regard to pricing and buyer incentives. This form may cause problems when two dominating companies merge, as it may trigger litigation regarding monopoly laws.
Another type of popular merger brings together two companies that make different, but complementary, products. This may also involve purchasing a company that controls an asset that the other company uses somewhere in its supply chain. Major manufacturers buying out a warehousing chain in order to save on warehousing costs, as well as making a profit directly from the purchased business, is a good example of this. PayPal's merger with eBay is another good example, as it allowed eBay to avoid fees they had been paying, while tying two complementary products together.
A merger is usually handled by an investment banker, who aids in transferring ownership of the company through the strategic issuance and sale of stock. Some have alleged that this relationship causes some problems, as it provides an incentive for investment banks to push existing clients towards merging, even in cases where it may not be beneficial for the stockholders.
The process will no doubt change in the future, as dynamic technologies allow for the development of a more streamlined marketplace that manages to protect the privacy of interested companies while linking up companies that could benefit from combining.
