Merger Definition

A merger is when two or more companies merge into one company or combine their assets. In every merger and acquisition, there are two primary parties:

• The company that’s purchasing the other company or its assets (often called the “acquiring company”)
• The company that’s being purchased (often called the “target” or “target company”)

Depending on the type of merger that occurs (more on this in a moment), one or more of these companies may cease to exist after the merger. 

What are the different types of mergers?

What are mergers? The two broad types of transactions included in the definition of a merger are direct and indirect mergers. These broad categories describe the way in which the companies combine. There are other subtypes of mergers — such as vertical and conglomerate — that detail the relationship of the companies before and after the merger. 

Direct Merger

In a direct or straight merger, the acquiring company purchases the target company. At the end of the direct merger, only one company survives. If it’s a forward merger, then only the acquiring company survives. In a reverse merger, the target company survives, and the acquiring company no longer exists. 

The acquiring company may prefer a reverse merger if the target has superior brand recognition or market presence. In that case, the acquiring company stands to gain more from buying the target and keeping the target’s name.

Indirect Merger

In an indirect merger, the acquiring company buys the target company by using a subsidiary (or “vehicle”). The subsidiary is an existing company that the acquiring company already owns, or it may be a new company created to carry out the merger. Because an indirect merger involves three parties, people also call it a “triangular merger.” 

If the target company exists after the indirect merger, then it’s a reverse triangular merger. If the subsidiary survives, then it’s a forward triangular merger. 

Merger Pros and Cons

Mergers of all types can be advantageous for the businesses involved, but they also have some drawbacks. Entrepreneurs would be wise to consider both the pros and cons before pursuing a merger with another company.  

Merger Advantages

Some of the top benefits of mergers include:

• Increases market presence
• Limits liability
• Saves a company from closing
• Increases profitability
• Allows a business to grow
• May decrease the taxes owed

This list isn’t exhaustive, of course, but these perks could come into consideration during a merger. 

Merger Disadvantages

The primary disadvantages of a merger include:

• Cost concerns
• Business closure
• Job loss for an entrepreneur and/or their employees

Carrying out a merger also means complying with state laws, which can be costly and time-consuming. 

Merger Considerations

When two (or more) business owners are pursuing a merger, there are lots of things they need to keep in mind as they work. All businesses involved should consider some key factors, such as:

• The laws in each business’s state of formation
• How the business will convert shares in the company in the merger
• Which company will survive the merger
• What type of merger is appropriate for the situation
• How to negotiate the merger plan

Doing research ahead of time helps set merging companies up for success. Since this process can be pretty complicated and high-stakes, it can be prudent for business owners to consult with a corporate attorney. Professional assistance can help both parties achieve a satisfactory merger agreement. 

Summary: Merger Definition

A merger occurs when two companies (or their assets) combine. Mergers can be beneficial, helping save a company from closing or expanding its market reach. But entrepreneurs who are going to enter into a merger have lots of considerations to make, including abiding by state laws, deciding which business(es) will survive after the merger, and how shares or ownership interests will be converted.

Recommended: Statutory Merger vs. Statutory Conversion

ZenBusiness Can Help

Starting, running, managing, and growing a small business is hard work. ZenBusiness is passionate about helping business owners navigate that process. Their business formation plans set a great foundation for entrepreneurial freedom. Plus, ZenBusiness offers a variety of business maintenance tools, including their Worry-Free Compliance Service, which makes it easier to handle state-specific requirements throughout the year.