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 (we’ll call this the “acquiring company”)
• The company that’s being purchased (let’s call this the “target” or “target company”)

Depending on the type of merger, 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

Now that you know about the two broad types of mergers, you’re ready to learn about the pros and cons of this business activity. 

Merger Advantages

The merger benefits include:

• Increases market presence
• Limits liability
• Saves a company from closing
• Increases profitability
• Allows a business to grow
• Decreases the taxes you owe

These are some merger benefits. Evaluate your situation before going through with a merger. 

Merger Disadvantages

Merger disadvantages include:

• Cost concerns
• Business closure
• Loss of a job for you or your employees

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

Merger Considerations

Now that you understand the merger meaning, let’s go over things to keep in mind when deciding whether to carry out a merger. There’s a lot to consider, such as:

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

Doing research ahead of time helps set you up for success. 

Summary: Merger Definition

In this post, we explored the merger business definition. Essentially, a merger occurs when you combine two companies or their assets. Merger benefits include being able to save a business from closing or expanding the company’s market reach. Things to keep in mind about mergers include whether the business will exist post-merger and how you would like to convert shares. 

Recommended: Statutory Merger vs. Statutory Conversion

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