A merger is the legal combining of two or more companies, usually with the aim of increasing market share, revenue, and profitability. In most cases, shareholders in the two merged companies receive shares (often at a premium) in the new company that combines them. If onlookers believe the merger is successful, they will buy the stock, causing its value to rise, or they will short-sell the stock (selling it in the hopes that the merger fails and drives down its value).
A major motivation for M&A is increased market share, and it is not uncommon to see a company acquire a competitor with the intention of absorbing them into their own corporate structure. Another business reason is achieving economies of scale. This involves reducing operational costs through streamlining processes, eliminating duplicate jobs, and spreading fixed costs across a larger enterprise.
Some mergers involve companies in completely unrelated industries, and these are called conglomerate mergers. Others are more strategic and occur between businesses that have some overlapping factors, such as customers or product lines. Still others are designed to gain dominance in specific sectors of the market, such as the merger between France’s Suez and Gaz de France that was averted by Nicolas Sarkozy, President of France at the time.
After the initial stages of a merger are completed, the remaining steps include dissolving the original company and forming a new one. This can require opening new business bank accounts, obtaining new state and federal tax IDs, and re-applying for licenses and permits. The process can take anywhere from 3 to 12 months, depending on the complexity of the deal and its consequences.