Merger Definition, Example and Importance
Merger Definition – “A process whereby two or more companies combine with each other and become one single entity”.
In other words, merger is an activity in which two entities combine with each other in order to form a new entity. This process involves the transfer of ownership, swapping of stocks and payment of cash between them. It is one of the financial activity which can occurs mostly between the companies within the same sector.
Merger involves two parties – Acquired Company and Acquiring company. Former is the one which surrender their majority equity shares to later. Whereas later is the company that purchases the majority of the equity share of the former.
Types of Mergers
In practice, there are mostly two types of mergers – horizontal and vertical.
Horizontal mergers – It refers to combining of two or more companies with each other belonging to the same industry. However such type of mergers are hardly seen and are not allowed. For example – Merger of Reliance with TATA.
Vertical Mergers – In vertical mergers, businesses with same value chain or supply chain merges with each other. For example – Merger of McDonald with ABC soft drink company.
In order to understand the merger definition more clearly, have a look over few of the examples.
- Hindalco Industries Ltd which is an aluminium manufacturing company merges with Novelis, a world leader in aluminium rolling.
- Merger of government owned entity Oil and Natural Gas Limited with Imperial Energy.
- Schoneweiss merge with Mahinda and Mahinda which is one of the largest vehicle manufacture in India.
- Merger of Tata Motors with Jaguar Land Rover.
Importance of Merger
One of the main advantage of merger is that, it provides the companies the benefit of utilizing the competitive advantage of the other company. Secondly it also helps the firms to cope up with the cut throat competition that is going on domestically as well as globally.
In addition to this, the capital as well as profits of the company also increases which allows the firms to invest in risky investment. There are various other benefits of merger as well such as economies of scale, greater efficiency, etc.
Related Financial Terms of Merger
- Cost of Capital Definition – Formula, Example and Importance
- Generally Accepted Accounting Principles Definition ( GAAP )