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Mergers Combine Corporations into New Entities

A merger is really a rather strange thing. A merger occurs when two companies become each other or, more specifically, both companies cease to exist and a new company is formed out of the operations of both.

The stockholders have their shares reorganized under the new company, and all operations fall under a new set of executive management, which usually consists of a combination of the management from the two individual organization prior to the merger. This type of arrangement is usually considered to be a merger of equals, or a combining of corporations on equal terms.

In reality, though, the larger or more financially healthy company tends to assimilate the other.

Although a merger is, technically, a combination of corporations to form a new one, which may imply a level legal playing field in the terms of the merger, the reality isn’t so simple.

It’s quite typical that mergers tend to occur between corporations wherein one has a dominant place in the market, allowing that corporation more leverage to maintain managerial control over not only the merger process but also how operations are run after the merger is complete. This control includes how finances are managed and representation in management, as well.

Why do mergers happen so frequently? It’s really a financial strategy. For corporations and large companies, some other forms of M&A carry negative connotations. Calling an integration a merger, which implies equality in the integration, allows both companies to maintain a positive image, thereby maintaining the market value of the stock of both companies.

If one company was acquiring the other, it may imply to investors that the acquired company was troubled or overvalued, causing the market value of the equity to drop and reducing confidence in the newly integrated entity.

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