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What Is a Merger?

A merger refers to the situation when two companies are absorbed into a single entity. Stockholders are allowed to keep equal interest in the new company—unlike in acquisitions, where one of the companies buys into the second company’s stock to have greater control.

Only a fraction of merger attempts really succeed, so it is common for the procedure to be done as discreetly as possible, and without informing employees and the general public until the deal has closed.

Though mergers are a bloody process, they have benefits. The most obvious of course is expansion: the companies can share resources and get a bigger share of the market, while cutting down significantly on business costs. It also allows a company that is making a lot of money to declare another company’s losses as a tax write-off.

Mergers often happen between two former competitors, since it allows them to combine market share and enable them to control pricing and buyer incentives. However, certain monopoly laws make it legally problematic for two dominant market players to merge. Another beneficial merger can occur between companies with complementary products or services, such as PayPal’s merger with eBay.

Mergers are also a growing trend, as the current business environment encourages streamlined operations and synergies. By partnering with other companies, and transferring technology and resources, even small players can survive (and even thrive). The fact that mergers may significantly reduce operating costs also make it a good strategy for a recession.

The merger process is often managed by investment bankers, who play the role of transferring ownership via stock sales.

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