Mergers

A merger is a transaction that results in the transfer

of ownership and control of a corporation. When one
company purchases another company of an
approximately similar size. The two companies come
together to become one. Two companies usually
agree to merge when they feel that they can do
something together that they can't do on their own.
 Mergers & Acquisitions
Mergers Acquisitions
Combining of two
business entities under
common ownership.
Two firms coalesce and
share resources in order
to realize a common goal
Parent stocks are usually
retired and new stock
issued
One firm buys the assets
or shares of others
another firm.
Take over implies the
acquiring firm is larger
than the target .
Can be a controlling
share, a majority, or all of
the target firm’s stock
 Mergers & Acquisitions
Mergers Acquisitions
Name may be one of the Can be friendly or hostile
parents’ or a combination Mergers & Acquisitions
One of the parents Usually done through a
usually emerges as the tender offer
dominant management
 3 Types of Mergers
Economists distinguish between three
types of mergers:
1. Horizontal
2. Vertical
3. Conglomerate
Horizontal mergers

A merger occurring between companies producing similar

goods or offering similar services. This type of merger
occurs frequently as a result of larger companies attempting
to create more efficient economies of scale.
Examples: Daimler-Benz and Chrysler
Vertical Mergers
merger between two companies producing different
goods or services for one specific finished product. The
merger of firms that have actual or potential buyer-seller
relationships.

Examples: An example of a vertical merger is a car

manufacturer purchasing a tire company
Conglomerate mergers
Consolidated firms may sell related products,
share their marketing and distribution channels
and perhaps production processes; or they may be
wholly unrelated.

Time Warner-TBS; Disney-ABC Capitol Cities;

Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-
Kinney, Ford - Bendix.
 Types of Conglomerate mergers
• Product extension conglomerate mergers
involve firms that sell non-competing
products use related marketing channels of
production processes.
Examples: Cardinal Healthcare-Allegiance;
AOL-Time Warner; Phillip Morris-Kraft;
Citicorp-Travelers Insurance; PepsiCo-Pizza
Hut; Proctor & Gamble-Clorox.
•Market extension conglomerate mergers join together firms
that sell competing products in separate geographic markets.

Examples: Scripps Howard Publishing—Knoxville News

Sentinel; Time Warner-TCI; Morrison Supermarkets-
Safeway;SBC Communications-Pacific Telesis
•A pure conglomerate merger unites firms that have no
obvious relationship of any kind.
Examples:BankCorp of America-Hughes Electronics ;R.J.
Reynolds-Burmah Oil & Gas; AT&T-Hartford Insurance
Anticompetitive Effects of Mergers
Issue: When and how are mergers welfare-reducing
•Horizontal mergers eliminate sellers and hence reshape market
structure. Recall that the structuralists, believe that
market structure is the primary determinant of market performance.
•Mergers may result in market foreclosure. For example, the
Justice Department feared that Microsoft's proposed acquisition of
Intuit would result in a foreclosure of the market for personal
finance software.
• Mergers may diminish potential competition. For example, the
acquisition of Clorox by Proctor & Gamble eliminated P&G as a
prime potential entrant in the market for household bleach.
Horizontal mergers have a direct
impact on seller concentration
Hence the potential to diminished
competition is clear to see.
Vertical and conglomerate mergers do
not affect market structure (e.g.,
seller concentration) directly. As you
will discover subsequently, these
types of mergers mergers can
nevertheless have anticompetitive
consequences.
 Ways of Merger
A merger can take place in following four ways:

By purchase of assets.
The asset of company Y may be sold to company X .
Once this is done company Y is then legally
terminated and company X survives .
By purchase of common share.
The common share of company Y may be purchased
by company X. when company X holds all the shares
of company Y it is dissolved .
Ways of Merger By exchange of share
for assets.
Exchange of shares for shares. Company X may give
its share to stake holders of company Y for its net
assets. Then company Y is terminated by its
shareholders who now holds shares of company X.
Company X gives its shares to the share holders of
company Y and then company Y is terminated
Vision of a successful merger :
Mutual benefit
Maximize profit
Expansion of a business
Economy of sales
Increase market share
Allocation of assets & liabilities
Diversification of risk
Goodwill
Product improvement
Future goal
liquidity