What is a Merger?

//What is a Merger?
What is a Merger? 2017-10-06T00:23:59+00:00

Definition: A merger is the combination of two companies into one by either closing the old entities into one new entity or by one company absorbing the other. In other words, two or more companies are consolidated into one company.

What Does Merger Mean?

What is the definition of merger? A merger is a financial activity that is undertaken in a large variety of industries: healthcare, financial institutions, private investments, industrials, and many more. There are two main types of mergers: horizontal and vertical.

Horizontal mergers occur when two businesses in the same industry combine into one. This type of combination can cause anti-trust issues depending on the industry. For instance, GM and Ford may not be allowed to merge because of anti-trust laws.

Vertical mergers occur when two businesses in the same value chain or supply chain merge. For example a hamburger restaurant might merge with a cow farm.

Let’s look at an example.

Example

The largest car manufacturer in the United States, Cars Incorporated, has announced an acquisition of the number three car manufacturer, Trucks Incorporated for a price of $45,000, paid through a combination of stock, cash, and debt. At the time of the announcement, Trucks, Inc. stock rose 10% to $45, and Cars, Inc. stock rose 5% to $73. In order to carry out this process, both firms must contact investment bankers and other financial professionals in order to verify the transaction and carry it through. Cars, Inc. will pay 2% of the purchase price, or $900, to the financial advisors for their help throughout this process.

The reason that Cars, Inc. chose to acquire Trucks, Inc. was due to an array of revenue and cost synergies, or savings, which could be realized by the joint entity: employee count could be cut by 5,000, and truck revenue can be boosted by $50,000, for combined revenue of $200,000. Additionally, it is reported that consumers will now pay 15% less per vehicle, due to the cost savings realized in the merger.

Mergers are a large part of our financial landscape and often help create more efficient and beneficial organizations, both for shareholders and for consumers.

Summary Definition

Define Mergers: Merger means the combination of two companies.