Merger

A merger involves the combination of two or more businesses on an equal footing to create a new entity where shareholders mutually share risks and rewards without any party obtaining control over another.
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A merger is a strategic decision in the business world where two or more companies combine to form a new entity. Unlike an acquisition, where one company overtakes another, in a merger, all participating entities typically have similar standing and agree to combine as equals.

Examples of Mergers

  1. Exxon and Mobil (1999): The merger between Exxon and Mobil was one of the largest in history, creating ExxonMobil.
  2. Glaxo Wellcome and SmithKline Beecham (2000): This merger led to the formation of GlaxoSmithKline, one of the world’s largest pharmaceutical companies.
  3. United Airlines and Continental Airlines (2010): Combined to form United Continental Holdings, increasing market share and operational scale.

Frequently Asked Questions (FAQs)

What is the primary feature of a merger?

A merger primarily involves the creation of a new business entity where all merging parties combine on relatively equal footing with none obtaining control over the others.

How does a merger differ from an acquisition?

In a merger, two companies combine as equals to form a new company, whereas in an acquisition, one company takes over another, and the acquirer usually retains control.

What are the criteria for identifying a merger according to Financial Reporting Standard 6?

According to the now-discontinued Financial Reporting Standard 6:

  • No party should be the acquirer or acquired.
  • All parties must participate in establishing the management structure.
  • Entities should be relatively equal in size.
  • The consideration received by shareholders primarily consists of equity shares in the new entity.

Are mergers common in the contemporary business environment?

True mergers are quite rare today. Many so-called mergers are, in fact, acquisitions in disguise.

Why has merger accounting been limited in contemporary business practice?

Merger accounting has been limited due to its abuse. It’s now mainly restricted to internal reconstructions within existing groups to prevent exploitation.

  • Acquisition: The process of one company purchasing most or all of another company’s shares to gain control.
  • Consolidation: The process of combining the assets, liabilities, and other items of two companies into a single entity.
  • Equity Shares: Shares representing ownership interest in a company, entitling the holder to dividends and voting rights.
  • Takeover: The acquisition of one company by another.

Online References

  1. Investopedia - Merger
  2. Corporate Finance Institute - Types of Mergers

Suggested Books for Further Studies

  1. Mergers and Acquisitions from A to Z by Andrew J. Sherman – An insightful guide into the process and strategies involved in mergers and acquisitions.
  2. The Art of M&A: A Merger Acquisition Buyout Guide by Stanley Foster Reed and Alexander Reed Lajoux – This book provides a comprehensive look at the practices in the M&A field.
  3. Mergers, Acquisitions, and Corporate Restructurings by Patrick A. Gaughan – An analytical approach to understanding M&As and restructurings in business.

Accounting Basics: “Merger” Fundamentals Quiz

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Merger Accounting
Mergent, Inc.