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Mergers and acquisitions

Mergers and acquisitions are the primary ways two companies combine to become one entity.

Expanded Definition

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.

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