What are Business Mergers and What Can We Expect?

When two businesses decide to combine into a single entity, it is called a merger. The parties can be companies, LLCs or any other type of business. The firms that merge may continue to do business under their original names or a new name, but they cease to exist as separate entities.

Horizontal and Vertical Mergers

A business merger can be horizontal or vertical. In a horizontal merger, the firms occupy similar positions within the same industry. For example, a horizontal merger would occur if one car manufacturer acquired another car manufacturing company. In a vertical merger, one company acquires a firm within the same industry, but which has a different role. For instance, joining with a supplier or customer is a vertical merger.

Mergers, particularly horizontal mergers, often reduce competition. For this reason, they are regulated under federal antitrust laws. A merger between similar firms may require government approval before it can proceed.

Impact of Mergers on Stock

A key concern for investor is the effect a merger has on shares of stock. In an all-stock merger, shares of one the target firm are swapped for shares of the acquiring company in an specified proportion. For instance, if Company A buys Company B, three shares of Company B stock are exchanged for one share of Company A stock. In an all-cash merger, the outstanding shares of the target firm are purchased for cash at a specific price. Some mergers involve a combination of cash payment and exchange of shares.

The effect of a merger on the stock price will vary, depending on how the market reacts to the merger. After an all-stock merger, the price might fall if shareholders are concerned about dilution of the voting power of their shares. Another example of the impact of a merger occurs when a cash offer is made for shares at a premium price. The shares of the target company will go up to match the price the acquiring firm has offered.

Impact of Mergers on Employees

Mergers often create anxiety among employees. Layoffs are a possibility, especially when duplicate functions such as accounting departments may be eliminated. On the other hand, if a merger is carried out to promote growth, it may mean more jobs and greater opportunities for employees. Executives of a target firm may receive guarantees and incentives if they agree to the merger. In order to minimize confusion, some firms make a special effort to keep employees informed about the merger process. Good communication and transparency to help maintain employee morale and confidence.

Other Considerations

Companies choose to merge with one another for a variety of reasons. A firm may want to increase its access to markets or block a competitor. Mergers can also offer opportunities for greater efficiency stemming from economies of scale and consolidation of overlapping functions. A businessperson may seek to sell his company to another firm because businesses can often pay more than individual firms. Young firms often seek a merger partner to provide capital for growth and access to larger markets.