This merger took place in 2000 and marked the beginning of the massive consolidation of Internet service providers. At the time, America Online was the largest ISP in the industry, but cable companies began to realize that internet services were the future. Time Warner was valued at $164 billion and was one of the largest cable companies in the United States. Acquisitions do not lead to the creation of a new company. Instead, one acquiring company buys and absorbs the second company. While mergers are entirely voluntary, acquisitions may not be voluntary. The acquired company is often liquidated. Sometimes mergers do not strengthen a company, but ultimately dilute its financial strength. This may occur more frequently if the newly formed company issues more shares on the same asset base of both companies prior to the merger. Mergers can also fail if the cultures between the two companies don`t align well, if there is resistance to restructuring management or operations, if technologies are incompatible, or if the workforce is disrupted.
If a merger is a difficult implementation, but one company still wants to work with the other, a takeover can be made by the stronger company by buying the weaker. There are five main types of corporate mergers: conglomerate, horizontal, vertical, market expansion, and product expansion. The nature of the merger depends primarily on the industry and the business relationship between the two merging companies. A merger is an agreement that combines two existing companies into one new company. There are different types of mergers and also several reasons why companies carry out mergers. Mergers and acquisitions are often done to expand a company`s reach, expand into new segments, or gain market share. All of this is done to increase shareholder value. Often, companies have a no-shop clause during a merger to prevent purchases or mergers by other companies. A congeneric merge is also known as a product extension merge.
This type is an association of two or more companies operating in the same market or sector, with overlapping factors such as technology, marketing, production processes, and research and development (R&D). A product extension merge is performed when a new product line from one company is added to an existing product line from the other company. If two companies become one in a product extension, they may have access to a larger group of consumers and thus a larger market share. An example of a generic merger is the merger of Citigroup with Travelers Insurance in 1998, two companies with complementary products. Key Finding: A merger occurs when two companies come together to form a corporation with new shares. Bank mergers are also quite common in the business world. In 2020, for example, Huntington Bancshares Incorporated and TCF Financial Corporation, a well-known U.S. regional bank holding company, merged solely into shares. Together, they created a new business with a market value of $22 billion. The terms “mergers” and “acquisitions” are often used interchangeably, when in reality they have slightly different meanings.
When a company takes over another business and establishes itself as the new owner, the purchase is called a takeover. From a legal point of view, the target company ceases to exist, the buyer absorbs the company and the buyer`s shares continue to trade while the target company`s shares are no longer traded. In the case of a merger, the boards of directors of two companies approve the amalgamation and obtain shareholder approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 1998, there was a merger between Digital Computers and Compaq, in which Compaq acquired Digital Computers. Compaq merged with Hewlett-Packard in 2002. Compaq`s ticker symbol prior to the merger was CPQ. This was combined with Hewlett-Packard`s ticker symbol (HWP) to create the current ticker symbol (HPQ).
A merger is considered co-generic if the companies offer different products or services, but operate in the same sector and sell to the same customers. Cogeneric mergers allow companies to sell new products, which is why they are also known as product extension mergers. For example, famous ketchup maker H.J. Heinz Co. was able to generate revenue from Kraft Foods Group`s popular macaroni and cheese (and vice versa) after the companies merged to form The Kraft Heinz Company in 2015. Bottom Line: A merger can benefit companies by increasing profits, expanding expertise, increasing market share, diversifying products, and minimizing redundancy. They are integrated when they are assured of a smooth conduct of joint operations adapted to common objectives. The transaction will be sealed once the participating companies have reached an agreement with clauses setting out the terms of the alliance. Usually, one party abandons its shares to integrate with another. The terms “merger” and “acquisition” are often used interchangeably, but there are important differences between the pairs.
Ambev merged with Interbrew and brought together the three and five largest breweries in the world. When Ambev and Anheuser-Busch merged, they merged the world`s largest number one and two breweries. This example represents both a horizontal merger and a market expansion, as it was an industry consolidation, but also an expanded international reach of all the brands of the combined company. A market expansion merger is a horizontal merger that allows two companies selling the same product to operate in a new market. For example, if an Eastern U.S. regional bank merged with a western U.S. regional bank to form the U.S. Bank of the East and West, it would be a market expansion merger. These types of consolidations help companies generate more revenue by expanding their business. Draft your merger or acquisition agreement and allow the purchase of shares and assets. Be sure to have it reviewed by a lawyer and provide all relevant background information. Another acquisition transaction, known as a “reverse merger,” allows a private company to go public in a relatively short period of time.
Reverse mergers occur when a private company with good prospects and seeking financing buys a publicly traded shell company with no legitimate business activity and limited assets. Conversely, the private company merges with the joint-stock company and together they become a brand new public company with tradable shares. Mergers are a great way for two companies with unique experience and expertise to come together and form a more profitable business than the two companies alone. A merger is considered a conglomerate acquisition if the companies operate in separate industries and have little or nothing in common from a business perspective. Think of a clothing company teaming up with a snack maker. Conglomerate mergers open up opportunities for cross-selling, market expansion and increased operational efficiency. If a corporate merger occurs, the same two companies can convert their previous shares into a new combined company share. First, they have to decide the value of each business, and then they divide the ownership of the new business accordingly. [Read the related article: Small Business Valuation: How to Determine the Value of Your Business] Let`s look at some concrete examples of mergers that have also made headlines because of their popularity. Companies interested in expanding their reach may decide to join forces in a merger agreement. What is a merger and how does it differ from an acquisition? Learn more about the different types of mergers below.
A company can buy another company with cash, shares, debt assumption or a combination of these. In small businesses, it is also common for one company to acquire all the assets of another business. Company X buys all of Company Y`s assets in exchange for cash, which means Company Y has only cash (and debts, if any). Of course, company Y will only become a shell and will eventually liquidate or enter other areas of activity. This is another major merger that took place in 2000. In this case, both companies existed in the pharmaceutical sector. Originally, Warner-Lambert planned to sell to another company, American Home Products. That deal collapsed and Pfizer collapsed to complete its own merger. A merger is the voluntary merger of two companies on broadly equal terms into a new legal entity. The companies that agree to a merger are pretty much the same in terms of size, customers and scope of operations. For this reason, the term “merger of equals” is sometimes used. Acquisitions, unlike mergers or in general, are not voluntary and involve the active purchase of another company.
In a takeover bid, one company proposes to acquire the outstanding shares of the other company at a specific price rather than a market price. The acquiring company communicates the offer directly to the shareholders of the other company, bypassing the management and the board of directors. In 2008, for example, Johnson & Johnson made a takeover bid for Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist – especially if there are some divergent shareholders – most takeover bids result in mergers. Mergers are subject to rigorous scrutiny by the Department of Justice and the Federal Trade Commission. These agencies decide whether a merger is legal. Without their blessing, companies cannot join forces for whatever reason. They publish a set of guidelines designed to help regulators decide whether a merger is legal. The goal of this process is to protect consumers from illegal prices and ensure that there are a variety of businesses in the market, rather than large monopolies controlling different industries.