A business merger is a deal where two separate businesses join into a single, new legal entity. Companies engage in mergers for many reasons, including expanding into new markets, adding technologies, reducing operational costs, eliminating competition, boosting revenue, and increasing market share.
Mergers may involve either cash or stock in exchange for ownership of another company. In this case, shareholders in the acquired company receive shares of the acquiring company, typically at a ratio proportional to their original stock’s value in the target company. In some cases, the acquiring company pays for the entire target company in cash. This is known as an acquisition, Investopedia reports.
When a company buys out the assets of a rival, it is known as an asset purchase. The acquiring company may choose to “cherry-pick” the assets and leave out liabilities that aren’t immediately foreseeable or quantifiable. This can be a good strategy in industries with unforeseen damage awards, like litigation from defective products or environmental damage.
When a firm acquires a competitor, employee turnover often spikes, especially during hostile takeovers. This can disrupt workflows, reduce morale, and erode team productivity. Acquiring firms must consider these issues and address them early on in the negotiation process. They must also avoid overvaluing synergies and underestimate integration challenges. An experienced M&A consultant can help.