when does a merger between companies typically occur course hero

A merger occurs when one company could benefit from combining its business operations with another so that both can contribute to increased shareholder value. In many ways, it is similar to an acquisition, so that is often why both actions are grouped together and called M&A (mergers and acquisitions). A merger of equals is primarily a theory.

Full Answer

What are the rival companies of RHC?

RHC Pharmaceuticals Inc., Lawrence Pharma Inc., and Quincy Pharma Inc. are three rival firms who have set up an alliance to conduct research and find a cure for cancer. They have made almost equal contributions to the research, and they also share their expertise with one another. However, the three firms will continue to behave as competitors in markets for other drugs and vaccines. What is this arrangement best referred to as?

Why did Turbo Autos enter into a strategic alliance with a local automobile company?

Thus, Turbo Autos had to enter into a strategic alliance with a local automobile company to get access to the foreign partner's well-established distribution channels. Which of the following reasons for entering into a strategic alliance is best illustrated in this scenario?

Why is it shortsighted to acquire companies?

In general, it is shortsighted to acquire companies as a defensive move to prevent rival organizations from gaining access to certain patents, technology, or customer bases.

What does the short duration of an alliance mean?

However, the short duration of these alliances often means there is little trust or commitment on either side. True. Managers who are eager to forge business alliances often forget that the expected benefits of the partnership must represent only a small percentage of its monetary and time-related costs. False.

Why have strategic alliances declined?

In recent years strategic alliances have declined because of increasing government regulation.

Why did Nirvana enter the strategic alliance?

Nirvana Shoes entered the strategic alliance to acquire the production system pioneered by StepOut Shoes. Similarly, StepOut Shoes agreed to the strategic alliance to study the design process of Nirvana Shoes. However, Nirvana Shoes was more successful and faster than StepOut Shoes in accomplishing its alliance goal.

How Mergers Work

A merger occurs when one company could benefit from combining its business operations with another so that both can contribute to increased shareholder value. In many ways, it is similar to an acquisition, so that is often why both actions are grouped together and called M&A (mergers and acquisitions). A merger of equals is primarily a theory. It means two companies convert respective stocks to those in a new and combined company. Often, in practice, both companies have to make an agreement that one buys out the other’s common stock from all of the shareholders to claim as its common stock. In rare cases, cash and other forms of payment are used to help speed up the equity transaction. Many times, they are called stock-for-stock mergers. Generally, mergers do not happen on a one-to-one basis, which means that a single share from one company doesn’t get a share of the merged company. Instead, the new company’s shares are received for the stake in one company and represented as a ratio..

Differences Between Acquisitions and Mergers

It is true that both processes are quite similar; still, you shouldn’t confuse the two. Many times, the distinction is more semantics and politics; few, if any, acquisitions are considered low volatility. In general, if the company isn’t going to change much, it’s likely an acquisition. If you have to go through significant restructuring, then it is probably a merger..

Understanding Buyout Circumstances

A buyout and its circumstances can be significant here. The investor needs to understand the merger and the types of benefits that the shareholders receive. He or she must also focus on the other company’s key information, which company is going to be in control, and relevant non-financial and financial considerations. Though it can seem counterintuitive, it can be a windfall for investors to own a company that is bought out by another. What if the company that is being bought has respectable performance and a good prospect for future endeavors? Goodwill is going to come into play here..

What Is Goodwill?

Goodwill often means intangible assets. Sometimes, these assets aren’t factored into stock prices when they were bought, which means that you might end up on top. Most people don’t quite understand goodwill, though. In essence, it’s the amount of money the company pays another to purchase it, and it’s almost always over book value. Intangible assets are often hard to value, so you can expect a phantom percentage. Therefore, the goodwill shown on a company’s balance sheets could be overvalued. This isn’t necessarily a great deal for someone who owns few shares, but if you own the company that’s going to be bought, it’s a win for you. Now, you may have invested in a company that’s not doing well. In this case, a merger might still be beneficial because it can give you an out. Of course, you can also make a better investment decision with the merger that you couldn’t make when you invested in the original company..

Considerations and the Importance of Your Vote

Just because a company decides to merge with another doesn’t mean that it is set in stone. The shareholders of each company have some say in the matter. In most cases, a publicly-held company is going to end with shareholders voting on the merger issue. If the considerations and analysis tell you that merging the companies is the wrong decision, it is best to vote with your share. Also, these analyses can tell you that this is a great opportunity. Voting with the shares ensures that you exercise your power and are part of the process. You may also want to consider non-financial points when looking over the merger deal. It’s not just about the money; the merger could result in a variety of lost jobs in an area already hurting. In some cases, the other company supports social and political campaigns that you don’t. Most investors do focus on whether the new company can make money. Still, it’s important to keep non-financial issues on the table, as they could be deal-breakers..

Financial Reports Analysis

It’s true that most people dislike reading financial statements, but you should examine pertinent information about each of the companies in the merger. Analyze and look over the company if you don’t know much about it. In that way, you can determine if it’s a sound investment for you. If you find out that it isn’t, the newly formed company isn’t likely to be that great either. Just make sure that you’re focused on the updated annual reports and financial statements from each company. A lot could happen since you looked at your company’s financial documents. New information is essential to help you determine what influenced the companies to start a merger..

Changing Dynamics and Understanding Them

The new company is likely to have many noticeable changes. In most cases, the biggest situation is the leadership change. Generally, concessions are made in merger negotiations. Therefore, the board members and executives of the combined company might change or plan to change at some point in the future. If you cast your vote for the proposed merger, you agree to the new changes, as well..

What is merger and acquisition?

A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.

How Do Mergers Differ From Acquisitions?

The term "merger" is used when the purchasing and target companies mutually combine to form a completely new entity. Because each combination is a unique case with its own peculiarities and reasons for undertaking the transaction, use of these terms tends to overlap.

What Is a Hostile Takeover?

Unfriendly acquisitions, commonly known as hostile takeovers, occur when the target company does not consent to the acquisition. Hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition.

How Does M&A Activity Affect Shareholders?

Generally speaking, in the days leading up to a merger or acquisition, shareholders of the acquiring firm will see a temporary drop in share value. At the same time, shares in the target firm typically experience a rise in value. This is often due to the fact that the acquiring firm will need to spend capital to acquire the target firm at a premium to the pre-takeover share prices. After a merger or acquisition officially takes effect, the stock price usually exceeds the value of each underlying company during its pre-takeover stage. In the absence of unfavorable economic conditions, shareholders of the merged company usually experience favorable long-term performance and dividends.

What Is the Difference Between a Vertical and Horizontal Merger or Acquisition?

Horizontal integration is the acquisition of a related business. A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry—for instance when Marriott International, Inc. acquired Starwood Hotels & Resorts Worldwide, Inc. 7

What is M&A in financials?

What Are Mergers and Acquisitions (M&A)? Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

What is a tender offer?

In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. Though the acquiring company may continue to exist—especially if there are certain dissenting shareholders—most tender offers result in mergers. 7

How does Merger work?

Typically, entities that decide to enter into a merger agreement are approximate of equal size in terms of the scale of operations. As such, it is sometimes known as “merger of equals”.

Why do companies merge?

Some companies go for the merger as it offers the benefit of economies of scale that results in a reduction in the cost of operations.

What is the purpose of a merger of equals?

Most of these are done to expand to new territories, gain more market share, cutback operating costs, expand top line or boots profitability. Post-merger, the shares of the new merged entity is issued to the existing shareholders of both the merging entities.

What is the difference between merger and acquisition?

Mergers and Acquisitions are somewhat different and some of the major differences are as follows: This is the process of combining two or more entities to form a new entity, while acquisition is the process in which the financially stronger entity takes over the shares of the financially weaker entity. This results in an amicable situation ...

What is the difference between a cash merger and a stock merger?

In a cash merger, the stocks of the target entity are purchased by the acquiring entity in cash, while in a stock merger, the stocks of the target entity are purchased in exchange for the stocks of the acquiring entity.

What is merger agreement?

The term “merger” refers to the agreement as per which two entities combine to form a new entity. In other words, it is the amalgamation of two separate entities into a single legal entity. In the corporate world, there are several types of mergers that are completed with the different types of intentions, such as to venture into new segments, ...

What is horizontal merger?

Horizontal: The merging companies are operating in the same industry selling the same product. Such are intended to draw benefits of synergy and market consolidation. Usually, it results in larger market share, reduction in operating costs and economies of scale.