A business merger is the legal joining of two or more businesses into a single entity. There are many reasons companies choose to merge, including expanding into new territories, adding technologies, reducing costs, eliminating competition and boosting revenue. A merger is also a way to take advantage of tax laws in different countries. The process can be complicated, and there are a number of steps that need to be taken to complete the transaction.
Mergers typically involve both companies transferring ownership of their assets and liabilities into the newly formed company. This may be through a share exchange, where the existing shareholders of each company receive shares in the newly combined entity, or an asset purchase, where the acquiring company buys the remaining assets of the acquired firm. During the first merger wave in the United States, most acquisitions took place between companies in the same industry, but since the third wave, acquirers have been more likely to diversify by purchasing firms that are outside their current market.
Adding additional revenue streams is another reason for companies to consider M&A, particularly when the acquired entity has valuable intellectual property or line of business (LOB) that can be combined with existing products and services to increase market penetration. Economies of scale are another benefit of M&A, as purchasing materials in bulk is usually cheaper than purchasing them individually.
Companies that undergo M&A often face integration challenges, ranging from cultural clashes to a loss of employee morale. In addition, mergers and acquisitions can be expensive and increase a company’s debt.