Mergers

Cynics define mergers as a ‘marriage of convenience’. Others define it as a fusion of companies purely based on necessity. In simple terms, when two companies which are generally of the same size agree to form a single company, it is known as a Merger. A merger involves exchange of shares or combinations of cash, shares and debentures.

There are various reasons why companies decide to merge. They need to evaluate whether they would want to merge as their businesses compliment each other or whether they would want to expand geographically.

An example of a successful merger is the Renault Nissan merger. The two auto giants have managed to retain their identities and at the same time consolidated their operations in certain areas. According to Carlos Ghosn, the CEO of Nissan, both the companies have focused on vision, strategy, commitment and results. He attributes these factors for Renault Nissan becoming one of the most profitable auto companies in the world.

Types of mergers

• Horizontal mergers
  When two companies which have the same product lines and the same markets merge, it is known as a Horizontal merger. An example of a horizontal merger would be Microsoft buying Apple.
  
  
• Vertical mergers
  A Vertical merger is a merger between two companies which have complimentary products. An example of this is a merger between a company which manufactures ice cream cones and another which manufactures ice cream. Another example of a vertical merger is the merger that took place between Times Warner Incorporated, a major cable operation and the Turner Corporation that produces CNN. This merger allowed Times Warner to have a monopoly over much of the programming on Television.
  
  
• Market extension merger
  As the name suggests, it is a merger between two companies which sell the same product in different markets. It allows the companies to expand their market as they have a wider reach.
  
  
• Product extension merger
  It is a merger between two companies which sell related products in different markets. An example of a product extension merger is Daimler Chrysler.

• Conglomeration merger
  A business is known as a conglomerate when four or more different products are sold by the company. Conglomeration merger is a merger between two companies which have completely different product lines. General Electric is an example of a successful conglomerate.

Acquisitions

An acquisition is slightly different from a merger. When a company purchases another company and establishes itself as the owner, this is known as an acquisition.

Types of acquisitions

• Stock acquisition
  When a company acquires all the common stock of another company for a specified price, it is known as a Stock acquisition. The buyer takes over from the stockholder of the company. This process does not involve bulk sales notices, contracts and leases etc. Additionally a tender offer to the target company can help avoid negotiations.
  
  The drawback here is that a very detailed due diligence is required. The other drawback is that shareholders of the target company can hold back the buyer from gaining control of all the outstanding stock of the company. The main disadvantage of a stock purchase is that the acquirer may assume actual and contingent liabilities that can cause significant unintended legal exposure.
  
  
• Asset purchases
  In this case, the buyer buys specific assets as well as liabilities. The purchase price is the tax and accounting basis of the assets, including any goodwill that is purchased. Asset purchases are commonly used to protect the buyer from unforeseen liabilities. Due diligence would be performed only on those specific assets and liabilities that would be acquired.
  
  
• Purchase merger
  A purchase merger is another definition of an acquisition. The purchase is made through cash or some other debt instrument. Companies prefer this kind of a merger as this helps them get a tax benefit. In an acquisition a company can buy another company with cash, stock or a combination of the two.
  
  
• Reverse merger
  A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.