Mergers and acquisitions
Mergers and acquisitions are the primary ways two companies combine to become one entity.
Companies merge with and acquire other companies in order to grow rapidly and consolidate or expand competitive advantages.
Mergers occur when companies of relatively similar size agree to go forward together as a single new entity. Horizontal mergers involve two companies that produce similar products in the same industry, for example, two drug companies. Vertical mergers involve two companies involved at different stages of production for the same product, for example, a manufacturer and a supplier.
Acquisitions involve one company, usually the larger entity, absorbing another company, either by negotiating a deal with the board of directors (a friendly takeover) or by seeking to overtake management control (hostile takeover). Many acquisitions are publicized as mergers to preserve face.
Companies may choose to merge with or acquire other companies for many reasons, including increased revenue or market share, reducing tax liability by purchasing a loss maker, vertical integration, geographical expansion, and economies of scale.
Mergers and acquisitions rarely produce the long-term positive effects they are planned or expected to have, suggesting that some mergers and acquisitions are made for reasons of managerial ego, empire-building, and lack of other ways to deploy capital.
Recent Mentions on Fool.com
- Could Comcast's Failed Merger Offer Be Good News for Time Warner Cable?
- Lessons from Worldcom: 2 Ways to Avoid Disaster Stocks
- Williams Companies' $13.8 Billion Kinder Style Merger: 3 Things Dividend Investors Need to Know
- Big Oil Dividend Stocks: Why Shell's $73 Billion Merger Could be Cheating Dividend Investors
- How One Stock Has Crushed the Competition For 10 Years Running
- What Is the Half-Life of Breitburn Energy Partners LP?