What is a Merger?

A merger occurs when two companies combine to form a single company. It is very similar to an acquisition or takeover, except that the existing  stockholders of both companies involved retain a shared interest in the  new corporation. By contrast, in an acquisition one company purchases a  bulk of a second company's stock, creating an uneven balance of  ownership in the new combined company.

The  entire merger process is usually kept secret from the general public,  and often from the majority of the employees at the involved companies.  Since the majority of  attempts do not succeed, and most are kept secret, it is difficult to  estimate how many potential mergers occur in a given year. It is likely  that the number is very high, however, given the amount of successful ones and their desirability for many companies.

There are a number of reasons by two companies may want to merge, some of which are beneficial to the shareholders and some of which are not. One reason,  for example, is to combine a very profitable company with a losing  company in order to use the losses as a tax write-off to offset the  profits, while expanding the corporation as a whole.

Increasing a company's market share is another major use of the merger, particularly among large corporations. By joining with major competitors, a company can come to dominate the market it competes in, giving it a  freer hand with regard to pricing and buyer incentives. This form may  cause problems when two dominating companies merge, as it may trigger  litigation regarding monopoly laws.

Another  type of popular merger brings together two companies that make  different, but complementary, products. This may also involve purchasing  a company that controls an asset that the other company uses  somewhere in its supply chain. Major manufacturers buying out a  warehousing chain in order to save on warehousing costs, as well as  making a profit directly from the purchased business, is a good example  of this. PayPal's merger with eBay is another good example, as it  allowed eBay to avoid fees they had been paying, while tying two  complementary products together.

A  merger is usually handled by an investment banker, who aids in  transferring ownership of the company through the strategic issuance and  sale of stock. Some have alleged that this relationship causes some  problems, as it provides an incentive for investment banks to push  existing clients towards merging, even in cases where it may not be beneficial for the stockholders.

The  process will no doubt change in the future, as dynamic technologies  allow for the development of a more streamlined marketplace that manages to protect the privacy of interested companies while linking up companies that could benefit from combining.