Merger refers to the process whereby at least two companies combine to form one single company.
- Mergers help firms to consolidate market and to gain competitive edge.
- A financial tool used for enhancing long term profitability by expanding their operations.
- Merger occurs when there is mutual consent between merging firms.
- Merger or amalgamation may take two forms:
- Absorption – merging of two or more companies into an existing company.
- Consolidation – merging of two or more companies into a new company.
- In a merger there is complete amalgamation of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies.
Types of Mergers
- Merger between companies competing in the same line of business activities.
- Number of firms in an industry gets reduced – may lead to monopoly.
- Regulated by governments to control their negative effect on competition.
- Eg: Bank of Rajasthan with ICICI Bank
- Eg: ACC cement with Damodar cement
- Merger between firms producing different goods or services for specific finished goods.
- Results in cost reduction (transportation etc)
- Two types:
- Backward vertical merger – TATA tea with tea gardens in Assam.
- Forward vertical merger – oil companies buying up service stations.
- Two firms merge to share some common expertise that may become mutually advantageous. (managerial, technology etc).
- Merger between firms that are involved in totally unrelated business activities.
- Two types:
- Main reasons – synergy, increasing market share, cross selling, to diversify, to reduce risk exposure etc.
April 16, 2020