What is a Merger?

What is a Merger?

Definition

A merger is the combining of two companies into a single entity. The intention of forming a new company could be to gain synergies, increase market share, or to reduce costs

What does merger mean?

When two companies come together to form a single larger firm, it is referred to as a merger. Remember that a merger results in the formation of a third company. So, when ketchup manufacturer Heinz merged with Kraft, a producer of cheese and dairy products, a new company called The Kraft Heinz Company was formed

There are several different types of mergers. The most common are

Vertical merger – a company could merge with one of its largest suppliers. This could give it control over the price of the raw materials that it buys. It could also assure it of a regular supply of some of the inputs that it needs for its manufacturing process

Horizontal merger – two firms producing the same product could merge to gain a stronger competitive position. For example, two large pharmaceutical companies could come together and form a new entity that would be able to charge higher prices for the drugs and healthcare products that it sells

Conglomerate merger – two firms in entirely different businesses may decide to merge. Why would they do that? Although there could be various reasons for the merger, the companies could have agreed to come together to increase their geographic footprint

Example of merger

In 2017, Dow Chemical Co and DuPont successfully completed their $130 billion merger. The new company is called DowDuPont

Why did the two giant chemical companies decide to merge? One reason is that the success of both firms depends to a great extent on their research and development capabilities. As a combined entity, the new firm will have a huge R&D budget. Additionally, the individual research labs could pool their resources and work together

However, the merger is not the last step in the reorganization process. Andrew Liveris, who was the executive chairman of DowDuPont until the end of March 2018, had said, “The true value of this merger lies in the intended creation of three industry powerhouses that will define their markets.

Summary

A merger can provide the newly formed company with the opportunity to gain a significant competitive advantage. It can also result in reduced costs and higher profitability for the new entity.