Mergers: An Overview of Types and Processes
A business merger is when two companies merge to form a single business entity. It is a major corporate event that requires careful planning and execution for success.
It is important to note that a merger is different from an acquisition, which occurs when one company takes over or absorbs another. The notable difference between mergers and acquisitions is that the former involves two entities which agree to combine forces and voluntarily negotiate the terms of their agreement; while acquisitions are typically one-sided and take place due to the takeover of one company by the other.
Mergers can be categorized as horizontal, vertical, and conglomerate. Horizontal mergers are when two companies in the same industry combine forces, whereas vertical mergers refer to the combination of two companies that operate at different stages of production. Conglomerate mergers involve companies operating in entirely different industries and sectors.
The actual process of merging two businesses involves complex legal and financial procedures, as well as due diligence to assess the risks and benefits of the merger. Generally, the process begins with both parties signing a Letter of Intent (LoI) and then comes an extensive research process that assesses the value, the structure, and the necessary regulatory clearance of the transaction. After an agreement is reached, the actual merger takes place.
Benefits and Drawbacks of Business Mergers
Many businesses have chosen to pursue a merger for the benefits it provides, such as economies of scale, increased market share, diversification, improved efficiencies, and lower costs. By combining forces, companies also have the potential to transform their operations and gain a competitive edge in the market.
However, every merger and every situation is unique, which means the risks and drawbacks must be assessed before finalizing a merger. Among the key drawbacks are the lack of control of one company over another, culture clashes between the two entities, potential overlap of products and services, integration difficulty, higher debt, reduced employee loyalty, and unforeseen liabilities.
Case Studies: Successful and Unsuccessful Mergers
Mergers can have either positive or negative outcomes, depending on the circumstances and planning involved.
One example of a successful merger is that of Marriott and Starwood Hotels, where Marriott made a bid to acquire Starwood Hotels for $12.2 billion in 2015. This merger brought together two of the world’s largest hospitality brands and has reaped major benefits for both companies.
An example of an unsuccessful merger is that of Daimler and Chrysler, which was viewed as a huge failure since the two companies failed to meet market expectations and were unable to generate key synergies that were anticipated at the time of the merger. The merger eventually led to the dissolution of the two businesses in 2007.