Mergers occur quite frequently in the U.S. Not only can mergers increase the strength of companies, but in some cases they can keep companies from going out of business. While there are many potential benefits of engaging in a merger, there are also some issues companies should be aware of before negotiating and signing a merger contract.
What Are Mergers?
A merger occurs when two businesses combine to form one new business. Oftentimes, companies will join forces in an attempt to gain a greater share of the market or as a way to increase efficiency. A merger where the combining companies are the same size is known as a merger of equals. However, there are situations where one company may be larger than the other. Mergers are usually friendly business transactions and involve companies that are in agreement on the combination.
Types Of Mergers
There are several types of mergers in which companies can engage. When looking at business structures, companies may be involved in a vertical, horizontal, market-extension or product-extension merger. Conglomerations describe mergers that take place between businesses from different industries that have nothing in common.
Vertical mergers occur when a company combines with its supplier. For example, a company that sells pizza may merge with a business that distributes different types of cheese or pizza dough. When two businesses that compete in the same industry, have the same products and solicit to the same market share combine, it is known as a horizontal merger.
Market-extension mergers reflect two companies that sell the same service or product, but to different markets. Product-extension mergers, on the other hand, involve businesses that sell different products within the same market. By joining the two businesses together, the resulting company’s market and/or product line will likely increase.
The route by which a merger is financed can also be used to classify the transaction. For instance, a consolidation merger occurs when two businesses are purchased and joined into a brand new entity. Purchase mergers are different in that they involve one business buying another. This sale is taxable, which offers a tax benefit to the purchasing company.
There are certain things a company should do in order to prepare for a merger. Before starting the process, company owners should have a full understanding of what the merger procedure entails. The company should know why it is carrying out the merger and what it has to gain by engaging in the business transaction.
It can be extremely advantageous to streamline the business before merging it with another company. In addition to cleaning up financial statements, company officials should ensure they are paid up on all of their bills and taxes. It is critical to keep all of the company’s documents, such as licenses, permits, employee contracts and registrations, organized so that they aren’t misplaced in the common chaos of a business merger.
As a way to strengthen the foundation of the newly formed company and to minimize the risk of future downfall, the owners should evaluate company cultures. They should derive a plan to transition these cultures into a new, improved and updated version of the company.
Prior to negotiating the terms of the merger and signing a legal contract, it is crucial that both parties thoroughly read and understand everything included in the official merger document, including confidentiality arrangements. These clauses prohibit the company from releasing certain information regarding the merger. In some cases, one company may unintentionally breach the terms of the contract because they simply did not know what was included in the merger agreement.
Benefits Of a Merger
Businesses that merge may have several advantages. In some cases, mergers may enable two struggling companies to survive in a harsh business world. This can occur by combining staff, choosing employees who are most qualified and letting go of employees who fail to make the mark. Companies may have a greater purchasing power once they are combined, meaning they are better able to negotiate the terms and prices of their purchases. This could result in better deals when buying office supplies and equipment.
When companies combine, they may have access to new technology that could potentially increase the performance of the business and give it an edge when competing in the market. Furthermore, businesses that have loyal followings can capture different areas of the market once they combine to form one solid company.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.