A Merger is a business transaction where two entities combine to form one entity. Generally, a cash or stock swap is involved in the deal, and the acquiring company then absorbs all the assets and liabilities of both entities. This can be contrasted with the less common method of acquisition in which a company takes over another through a stock purchase, leaving all the existing companies as empty shells.
The main reason companies merge is to increase size and scale and therefore drive more revenue into their bottom lines. But there are other reasons as well, such as to enter new markets, or to cut operational costs and improve management. Another reason is to achieve synergies, which are efficiencies that can be gained by companies of similar sizes joining forces, such as buying products in bulk or pooling resources.
Mergers are complex legal transactions with lots of steps both companies have to take before the deal can be made official. Getting shareholder and regulatory approvals is one thing, but then there’s the matter of employees, customers, and even the company culture to consider. In many cases, mergers result in layoffs or significant changes in employee roles, which can be stressful for everyone involved. The famous 2000 merger between AOL and Time Warner serves as a textbook example of why ‘bigger doesn’t always mean better’.