Definition of Merger
The definition of merger in general and in finance can be stated as follows:
"Merger is an absorption of one or more companies by a single existing company."
"Merger is an act or process of purchasing equity shares (ownership shares) of one or more companies by a single existing company."
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Meaning of Merger
Before we understand, What is Merger? First, let's find out the simple meaning of an acquiring company and acquired companies.
- Acquiring company is a single existing company that purchases the majority of equity shares of one or more companies.
- Acquired companies are those companies that surrender the majority of their equity shares to an acquiring company.
Merger is a technique of business growth. It is not treated as a business combination.
Merger is done on a permanent basis. Generally, it is done between two companies. However, it can also be done among more than two companies.
During merger, an acquiring company and acquired companies come together to decide and execute a merger agreement between them.
After merger, acquiring company survives whereas acquired companies do not survive anymore, and they cease (stop) to exist.
Merger does not result in the formation of a new company. The management of acquiring company continues to lead (direct) the merger.
Example of Merger
Consider the example of merger shown in the following diagram.
In the above example, Company 'A' and Company 'B' are operating (existing) in the market. Company 'A' is an acquiring company, and Company 'B' is getting acquired by Company 'A'. In other words, Company 'B' gets merged with Company 'A'.
In this example of merger, Company 'A' will purchase the majority of equity shares (ownership shares) of Company 'B'. Company 'A' will take over the assets and liabilities of the Company 'B'. The shareholders of the Company 'B' will be given the shares of Company 'A'. The acquiring Company 'A' will continue to operate (function) by its erstwhile (former) name.
Some recent examples of well-known mergers are as follows:
- British Salt operating in UK merged with TATA Chemicals based in India.
- Zain Telecommunications operating in Africa merged with Bharti Airtel Limited based in India.
- Bank of Rajasthan operating in India merged with ICICI Bank (India).