Why?

Company mergers take place when the equity of two or more companies is mixed together in such a manner that either they all disappear and give rise to a completely new company (strict merger) or only one of them remains after the transaction (takeover).

Although the purpose of acquiring a company is value creation, the aim of most strict mergers is to avoid value destruction. They are therefore usually defensive moves. In line with their defensive purpose, pure mergers are horizontal integrations based on operational synergies between the merged companies. Although they may lead to increases in sales, synergies usually spring from reductions in cost due to economies of scale and economies of scope.Furthermore, some sectors require a great deal of investment in research and development and also have a high rate of mergers.

Sharing R+D and achieving a turnover to minimize the impact of amortizing the investment on the profit and loss account in real terms is fundamental for such companies. For companies that are listed on the stock exchange, mergers are generally protective measures against possible hostile takeover bids or to gain the optimum size in markets in which a great deal of concentration is taking place.

However, most pure mergers are takeovers, even if they do not appear to be. The value of the merged companies, which is determined by the swap ratio, and the resulting balance of power, are what really determine the kind of transaction it is.

Next >