A merger is a combination of two (or more) companies coming together under one operating umbrella in hopes of creating corporate efficiency over and above what any one could accomplish on their own. In general, a merger occurs when a company finds benefit in combining business operations with another company in a way that will contribute to increased shareholder value. A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the merged corporation. Most mergers are accomplished after both companies agree on specific details including cost, legal structure, employee retainment and management hierarchy.
Although used synonymously, merger and acquisitions (M&A) have different features. An acquisition is the purchase of one company by another in which no new company is formed. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. This can be voluntarily or by other persuasive actions such as tender offers.
There are four types of mergers and acquisitions; horizontal, vertical, congeneric or conglomerate. In a horizontal merger, one firm acquires another firm that produces and sells an identical or similar product in the same geographic area and thereby eliminates competition between the two firms. For example, one beer manufacturer might purchase another. Conversely, a vertical merger entails expanding forward or backward in the chain of distribution, toward the source of raw materials. For example, an auto parts manufacturer might purchase a retail auto parts store. A congeneric merger occurs between firms in the same general industry but having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company. Conglomerate mergers encompass all other acquisitions including pure conglomerate transactions where the merging parties have no evident relationship.