Growing your business with mergers and acquisitions

Mergers and acquisitions refer to different business strategies for buying, selling and integrating companies to encourage the financial growth of one firm. The merger process begins when two companies make the decision to start a single company—existing stockholders from both firms remain involved in the formation of a new corporation. The main difference between a merger and an acquisition is that the latter is considered a takeover rather than a joining: one company purchases the stock of another company and produces an imbalanced ownership situation in a new firm. In reverse mergers, a public company is acquired by a private firm.

Business mergers are often secretive processes kept away from the public eye until completed. Usually, even employees are kept in the dark until a conclusive agreement is reached. Why? Because many merger attempts include sensitive negotiations that can be easily disturbed by unwanted media attention or in-house rumors. In fact, most mergers are unsuccessful, in part because of public exposure to these negotiations.

Why Merge?

Companies may choose to engage in a partnership for a number of different reasons. In some cases, a merger is the best option for a successful company and a less than successful company. In the case of a merger between these two firms, the new corporation could use the unsuccessful company's losses as a tax write-off to offset taxes on its profits, while incorporating the best managers and employees from a competitor.

One obvious benefit of a merger can be found in merger accounting: increasing the market share of a new firm by combining the interests of two previously smaller companies. For example, in a market dominated by three firms in which one is larger than either of the other two, the two smaller organizations may have a better chance of challenging their competitor for a market lead by merging and, effectively, joining forces. Larger market share can help a company better control its pricing structure by creating name recognition.

Mergers may also be beneficial in circumstances where two companies make similar or complementary products. For example, two carmakers may merge to share technology, capital and expertise, while producing vehicles with unique pricing structures.

In all cases, however, companies need to be cognizant of monopoly and litigation laws, as accusations of unfair business practice may result in cases where mergers lead to market dominance.

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