The term merge means “to plunge or sink in,” and comes from the latin word “merger” i.e. “to dip, immerse,”. From the beginning of 1700, it is used in the legal sense of “absorption of an estate, contract, etc. into another”. In particular, it refers to the sinking or “drowning” of a lesser estate into a greater. The term is also used for the extinguishment of any contract by absorption in another.
With “mergers and acquisitions” specialists refer to all those corporate finance transactions that lead to fusion of two or more companies. The merging companies cease their legal existence to merge their assets into a new company. The Acquisition is a form of merger where one company (acquiring) retains its legal identity annexing other companies that cease to exist. Often, a new company is created.
How does a merger work?
Usually, two similar companies (in their business they do or in their size) choose to join their businesses together. The act of merging can be taken after the agreement upon the combination expressed by both businesses (i.e. by both board of directors, owners and/or stockholders).
Why merging two companies?
There is more than one reason:
- Strategic: to improve competitive positioning and refocus its core business.
- Economics: to reduce costs, performance and improve profits or to obtain better rating increasing free cash flow.
- Tax: to reduce taxes by means of international operations.
Does it work?
Apparently, merging two companies does not always work. A research, lead by HayGroup in partnership with the Sorbonne in Paris in 2003, showed that on 200 European leaders engaged in the 100 largest Merger & Acquisition, only 9% of the operations were “completely successful”. Only one third had experienced a significant increase in shareholder value, sales or market share, or, alternatively, a significant reduction in costs.