Company merger: what it is, how it happens, advantages and disadvantages

Merger processes between businesses can happen for various reasons, and they include expansion, just joining forces, among other expectations, which generally consider the positive side rather than the negative aspects of a merger.

But, do you know exactly how a company merger happens? To answer this and other questions, we have gathered the following information in this article:

What is a company merger?

The meaning of fusion can be understood as the union or mixture of two or more distinct elements, transforming them into something unique. In the business sector, this procedure is recognized when two or more organizations come together to form a new one, with legal action agreed.

The main objective of merging companies is to create a new venture that is stronger than the parties were alone. As a result, it is expected that the shares of both merging companies will increase in value during, and especially after, the union.

Of course, it is necessary to consider all market issues, and this includes amounts invested in the merger and a thorough analysis of the assets of each business.

After the merger, the ventures involved become one, and to avoid post-merger regrets, it is important that everything is analyzed before the merger between companies.

Is spin-off and merger the same thing?

No, the split process occurs when a legal entity wishes to divide its assets with two or more companies.

The main difference between a merger and a spin-off is the fact that the former results in the creation of a new company, formed from the assets of the old ones, which are extinguished and merged into a new company.

In a spin-off process, there may or may not be such extinction, but it is normally an action that transfers part or all of the assets of one company to another.

What is the difference between merger and incorporation?

The process where one or more companies are absorbed by another is called incorporation. Therefore, the incorporating company becomes the owner of all rights, obligations and assets of the companies extinguished as a result of the merger.

In the incorporation process, all incorporated companies disappear, and the incorporating company remains as before. In the process of merging companies, all the companies involved cease to exist, as the merger gives rise to a new company.

What about acquisition and merger?

In this instance, the purchased firm typically loses its identity and integrates with the purchasing corporation. Overall, acquisitions are purchases rather than agreements. To finalize the transaction, the acquiring business often purchases the other company’s outstanding shares.

Despite being very confused, acquisition and merger carry completely different functions. Acquisition is a process in which a given company buys shares or even full control of another organization, taking control through monetary transactions of the business.

In the process of merging companies, two or more organizations usually join forces to create a new business.

What does the law say about company mergers?

Business mergers are regulated by the Corporations Law (Law 6404/76 ), and must be discussed and agreed upon in a meeting with all parties involved in the merger.

In the Corporation Law it is highlighted that:

  • The merger determines the extinction of the companies that join together, to form a new company, which will succeed them in terms of rights and obligations.

Although each case is extremely specific and has different particularities, the merger operation results in the disappearance of previous companies to create a new one, and this formalization is only carried out after a very careful analysis of all the important points of a merger of companies.

Types of company mergers

There are five principal kinds of business blends known as consolidations, specifically: vertical consolidation, even consolidation, combination consolidation, market expansion consolidation and item augmentation consolidation.

Each merger category is primarily based on the industry and business relationship between the companies involved in the merger process. See below for more details on each type of company merger.

Vertical merger

One company may produce parts that the second company needs to make its own products. By merging, these companies will no longer have intermediaries in their manufacturing, which becomes economical for both parties.

A good example of a vertical merger would be an auto parts manufacturer choosing to merge with a company that provides the raw materials needed to manufacture those parts.

Horizontal merger

Companies operating in markets with less business merge to gain a larger market.

Horizontal mergers are very common between companies that sell similar products or services. This results in the elimination of competition, makes processes more economical, and growth faster.

In other words, when companies that offer the same products merge, with the intention of achieving greater scale in the market, we can say that these businesses carried out a so-called horizontal merger.


A conglomerate merger is a union of companies that operate in unrelated activities. The union only happens if it increases shareholder wealth.

A conglomerate merger occurs when two or more organizations intend to gain market extensions. Although they operate in unrelated business activities, they are interested in expanding their markets using the other company’s resources.

Market Extension Merger

Companies operating in different markets but selling the same products combine to access a larger market and customer base.

A market extension involves companies competing with similar products in different markets, and by merging, they gain access to a larger market and a more diverse customer base.

Product Extension Merger

This type of merger results in the addition of a new product to a company’s existing line. With the union, companies can access a larger customer base and increase their market share.

Such mergers happen between companies that operate in the same market. Product extension mergers often occur between companies whose products already complement each other.

Why do companies merge? What are the advantages?

Mergers are a great way for two companies with experience and knowledge to come together and form a more profitable business than would be the case if the two companies remained in parallel.

Companies that merge often gain more market share, reduce their production costs , increase their profits, win over more consumers and become much more successful.

The merger of companies has more advantages than disadvantages, and this becomes clear when evaluated in a more technical way, where the market is strengthened thanks to the emergence of the new venture. See below the main advantages of merging companies.

Organizational growth

Authoritative development is something that many organizations take a stab at, no matter what their size. It can possibly give organizations different advantages, which incorporate more prominent capacity to endure market vacillations, more noteworthy power and more prominent proficiency from economies of scale.

A company that intends to expand its business geographically can merge with another similar company that operates in the same area. This is also the case with companies with similar or complementary products, which see the merger as an opportunity for organizational growth.

Revenue increase

Company mergers can also be seen as profitable businesses, especially in times of crisis and financial insecurity.

Many companies benefit from merging with other businesses, mainly because they are able to dominate a specific niche in the market, guaranteeing more profit and enhancing growth and revenue opportunities.

Cost reduction

A merger of companies unifies spaces, processes and people, and this can be very positive, especially if we consider cost reduction with two locations, two teams, etc.

A vertical merger, for example, can reduce production costs, streamline product development processes and reduce financial waste.

Culture transformation

For organizations seeking to become more agile and innovative, the transformation of organizational culture becomes surprisingly positive with the merger of companies, especially when this influences positive changes in culture.

Of course, changes can be challenging, however, in a merger, it is expected that the best side of each company involved will be maintained, and this influences transformations and diversification.

Market diversification

The diversification strategy allows companies to find potential markets they can explore or new products they can launch to increase their sales and revenue.

And what are the disadvantages?

Although merging companies provides synergies and savings that can lead to greater efficiency and profitability, it is important to note that mergers can also have a downside.

When a merger is poorly prepared, challenges arise such as:

  • Increased product or service prices: a merger reduces competition while increasing market share. Thus, the new firm might obtain a monopoly and increase the pricing of its products or services.
  • Gaps in communication : if there is not some attention paid to adapting employees to new organizational cultures, it can result in a gap in communication and affect the performance of these employees.

Impediment of economies of scale: in cases where there is little in common between companies, it may be difficult to obtain synergies. Additionally, a larger company may be unable to motivate employees and achieve the same degree of control.

How does a company merger work?

During a merger, the companies involved will likely undergo major restructuring, and this affects corporate leadership and operations.

First, a meticulous analysis of all assets, rights and obligations takes place. After the legal procedures to complete the merger process, the companies will guarantee more resources and scale of operations.

How does it happen?

Companies often merge to become more competitive and benefit their shareholders. A typical merger process includes procedures that involve:

  • Developing a strategy — Developing a good acquisition strategy revolves around the acquirer having a clear idea of ​​what it expects to gain from the merger.
  • Search for potential targets — Evaluate potential target companies.
  • Conversation and planning — The acquirer contacts one or more companies that meet their search criteria.
  • Negotiations — Once the initial offer has been presented, the two companies can negotiate the terms in more detail.
  • Closing and integration — The deal is closed and the target and acquirer’s management teams work together on the process of merging the two companies.

While it is typically seen as an equal split in which each side retains 50% of the new company, this is not always the case. In some mergers, one of the original entities obtains a greater percentage of ownership in the new company.

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