In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. It refers to an agreement in which two companies join together to form one company. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. The combination of the two companies involves a transfer of ownership, either through a stock swap or a cash payment between the two companies.
For example, in 2007 a merger deal occurred between Digital Computers and Compaq whereby Compaq absorbed Digital Computers. So, it may result in a stronger company with combined assets, competencies, and markets.
There are different types of mergers:
- Horizontal – between companies that are in direct competition with each other in terms of product lines and markets.
- Vertical – between companies that are along the same supply chain.
- Strategic – it is a merger transaction undertaken to achieve economies of scale.
- Financial – it is a merger transaction undertaken with the goal of restructuring the acquired, company to improve its cash flow and unlock its hidden value.
- Market-extension merger – between companies in different markets that sell similar products or services.
- Product-extension merger – between companies in the same markets that sell different but related products or services.