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  • Daniel Rodriguez

Understanding the Unique Benefits of Mergers Compared to Acquisitions

When media outlets in California and around the country mention mergers, the transactions they are reporting on are usually acquisitions. A merger is the joining of two companies of approximately equal size, which does not happen very often. An acquisition is the outright purchase of a company by a (usually) much larger company, which is far more common. Merged companies combine their assets and liabilities. A company that completes an acquisition assumes the assets and liabilities of the target business.

The benefits of a merger

Businesses pursue mergers and acquisitions for several reasons. Acquiring or merging with a competitor can reduce overheads through economies of scale and improve market share, and it is not uncommon for both companies to retain their brand identities after the transaction has been completed. However, mergers and acquisitions involving industry leaders can stifle innovation and drive up prices, which is why these transactions are scrutinized closely by the Federal Trade Commission and U.S. Department of Justice.

Types of mergers

There are several types of mergers. A horizontal merger is the combining of two companies that compete directly in the same market. A vertical merger involves companies that operate in the same industry but at different points in the supply chain. An example of a vertical merger would be a film studio combining with a theater chain. Conglomerate mergers involve companies in unrelated industries, and market extension mergers are entered into by companies that offer the same products or services in different markets. There are also product extension mergers that involve companies that manufacture related but different products.

Mergers are usually good for investors

Mergers are usually good news for investors because they make companies stronger and more competitive. The merger process is complex and can take months to complete, but the resulting larger company may be better positioned to take advantage of opportunities and achieve long-term growth.

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