Explain merger
11/September/2025 00:22
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Merger: Meaning, Concept, Features, Advantages, Disadvantages & Examples
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Meaning and Concept
A merger is a business arrangement where two or more companies combine to form a single new entity.
It is usually done between companies of similar size and strength.
In a merger, both companies cease to exist legally and a new company is formed, inheriting the assets, liabilities, and operations of the combining firms.
The main goal is synergy—to create a stronger, more competitive business than the individual companies could achieve separately.
Example:
Glaxo Wellcome + SmithKline Beecham = GlaxoSmithKline (GSK).
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Nature of Merger
1. Combination of Equals – Usually involves companies of comparable size.
2. Creation of a New Entity – Original companies lose their separate identity.
3. Mutual Agreement – Must be approved by boards and shareholders of both companies.
4. Strategic Purpose – Growth, diversification, market expansion, and economies of scale.
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Types of Merger
1. Horizontal Merger – Between companies in the same industry and at the same stage.
Example: Vodafone + Idea Cellular (2018).
2. Vertical Merger – Between companies in the same supply chain.
Example: A car manufacturer merges with a tire manufacturer.
3. Conglomerate Merger – Between companies in unrelated businesses.
Example: Tata Steel + Tata Power (different sectors).
4. Market-Extension Merger – Companies in the same industry but different markets merge to expand reach.
5. Product-Extension Merger – Companies producing related products merge to diversify product lines.
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Features of Merger
1. Mutual Consent – Requires agreement of all parties.
2. Pooling of Resources – Capital, technology, employees, and assets are combined.
3. Legal Process – Requires approval of regulatory authorities.
4. Synergy Objective – Aim to achieve cost savings, higher efficiency, and stronger market presence.
5. Shareholder Approval – Both sets of shareholders must agree to terms.
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Advantages of Merger
1. Economies of Scale – Lower production costs due to larger operations.
2. Increased Market Share – Strengthens competitive position.
3. Diversification – Reduces dependence on a single product or market.
4. Better Resource Utilization – Combines capital, technology, and workforce.
5. Global Expansion – Easier entry into new markets.
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Disadvantages of Merger
1. Cultural Clashes – Different corporate cultures may lead to conflicts.
2. High Cost & Complexity – Legal, financial, and administrative challenges.
3. Job Losses – Duplication of roles may lead to layoffs.
4. Integration Issues – Merging systems, policies, and management may be difficult.
5. Risk of Failure – Not all mergers achieve intended synergy or profitability.
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Examples of Merger
1. Vodafone + Idea Cellular (2018) → Created Vodafone Idea Limited.
2. Glaxo Wellcome + SmithKline Beecham (2000) → Created GlaxoSmithKline.
3. Exxon + Mobil (1999) → Created ExxonMobil, one of the largest oil companies in the world.
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Conclusion
A merger is a voluntary combination of companies to form a new entity.
It is aimed at synergy, market expansion, and efficiency.
While it offers economies of scale and diversification, challenges like cultural integration and high costs must be managed carefully.
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