MERGER

By Palash Goyal

MERGER

A merger is a transaction that results in the transfer of ownership and control of a corporation. When one company purchases another company of an approximately similar size. The two companies come together to become one. Two companies usually agree to merge when they feel that they can do something together that they can't do on their own.

When two companies join to form one new firm if it is

voluntary, also known as a ‘merger’

Types of Merger-Horizontal merger :- A merger

occurring between companies producing similar goods or offering similar services. This type of merger occurs frequently as a result of larger companies attempting to create more efficient economies of scale. Example:- The amalgamation of Daimler-Benz and Chrysler Company A Company B Company A B.

Vertical Mergers Definition:- A merger between two companies producing different goods or services for one specific finished product. The merger of firms that have actual or potential buyer-seller relationships.

Example:- An example of a vertical

merger is a car manufacturer purchasing a tire company. Product of company A Product of Company B Product of company A B

Conglomerate Merger :-

A merger between firms that are involved in totally unrelated business activities.

There are two types of conglomerate mergers:-

Pure:- Pure conglomerate mergers involve firms with nothing in common .

Mixed:- mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Example:-A simple example would be, American Broadcasting company (ABC) which has highest broadcasting channels joining Waltdisney that creates cartoon characters to promote cartoon channels in America.

Ways of Merger A merger can take place in following four ways: By purchase of assets.

By purchase of common share. The asset of company Y may be sold to company X . once this is done company Y is then legally terminated and company X survives .

The common share of company Y may be purchased by company X. when company X holds all the shares of company Y it is dissolved .

Exchange of shares for shares.

Company X may give its share to stake holders of company Y for its net assets.

Cont.

Firms are sometimes keen to merge when:

•they can make savings from being bigger.

•this is known as gaining ‘economies of scale’.

•they can compete with larger firms or eliminate competition.

•they can spread production over a larger range of products or services

Economies of Scale

•Technical economies , when producing the

good by using expensive machinery intensively.

•Managerial economies,

by employing specialist managers.

•Financial economies, by borrowing

at lower rates of interest.

•Commercial economies, by buying materials in bulk.

•Marketing economies, spreading the cost of advertising

and promotion.

•Research and development economies,

from developing better products.

There are sometimes problems

that can affect integrated firms.

These are known

as ‘diseconomies of scale’

•Firms are too big

to operate effectively.

•Decisions take too long to make.

•Poor communication occurs.

Cont..