Debt Dictionary

Mergers and Acquisitions

Investment Dictionary -> Mergers and Acquisitions

In the corporate world, mergers and acquisitions refer to the establishment of a single company through the combination of their assets and liabilities. If the firms are fairly equal in size and breath, one of the companies issues and distributes shares among the shareholders of the other company. The merger typically involves stock swap so that the two entities bear responsibility for all risks. This article will mention several types of possible mergers but the list is not exhaustive.

Horizontal mergers will occur between two or more entities that are engaged in the production of similar goods and services. In addition, they are usually in direct competition for a particular segment of the market. Vertical mergers, on the other hand, stand for mergers between entities that specialize in different products which go into the composition of another product. This kind of merger occurs in order to combine assets and to strengthen the position of the two entities. The market extension mergers take place between companies that sell the same type of product in different market niches. On the other hand, the product extension mergers involve companies that target the same segment of the market and sell similar products and services. Finally, purchase mergers occur when one entity acquires another through direct sale. It should be mentioned that mergers result in job losses. The new entity does not need twice the number of employees in its accounting, marketing, and sales departments. From the shareholders` perspective, mergers help to reduce direct costs.

Acquisitions stand for the takeover of one entity by another. In the legal sense, the target firm will stop functioning as a separate and distinct entity. One company will purchase most or all of the company’s ownership of another firm. Typically, acquisitions represent a part of an investment strategy which aims at further growth. They occur when companies consider it more beneficial to acquire existing businesses than to expand on their own.

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