A merger involves combining two companies into one entity through a legal consolidation of assets, liabilities and equity. It can help businesses achieve economies of scale, gain a competitive advantage, or enhance financial stability and performance. Generally, the most successful mergers involve companies that offer complementary products or services. This allows for cross-selling and market extension opportunities.
The company that acquires the other in a merger is known as the “acquiring entity.” The acquiring entity may purchase the entire stock of both companies or take over all or part of their operations. In most cases, the acquired entity remains in business and operates under its own name after the merger takes place. In other cases, the acquiring company will dissolve and a new entity is formed to take over the business.
During the third merger wave (1965-1989), corporations bought into more diverse industries as a way to smooth out cyclical fluctuations or to diversify their investment portfolios. Today, the fifth merger wave is seeing more acquisitions between similar entities rather than companies with completely different operations.
In a vertical merger, former partners in the same supply chain join forces to control multiple steps of the product process as a single entity. This is most evident in the Microsoft acquisition of LinkedIn, where the software-as-a-service (SaaS) leader gained access to premium LinkedIn features and enhanced its Dynamics CRM solutions. The classic example of a product extension M&A is when a printer company purchases an ink cartridge manufacturer. This allows the printer company to provide its customers with a one-stop shop for all their printing needs without the expense of building additional departments.
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