Business Mergers: What They Are, Types, and the Complete Process

A business merger is a complex corporate strategy aimed at consolidating the competitive position of organizations and generating significant operational and financial synergies that would not be achievable independently. In general terms, a business merger involves the legal and economic union of two or more legal entities into a single operating structure, either through the creation of a new company or through the absorption of one company by another existing company. This definition corresponds to the conceptualizations used in specialized literature on Mergers and Acquisitions (M&A) and corporate law.

This article analyzes the fundamental aspects of business mergers in technical language, including their classification, the phases of the integration process, the strategic objectives that motivate these operations, and the key considerations for their success.

Concept and Strategic Objective

A business merger occurs when two or more companies decide to integrate their assets, liabilities, operations, and organizational structures to operate as a single entity or allow one to absorb the others. Unlike an acquisition, where one company buys control of another and the latter retains some of its legal independence, a merger generally involves a joint growth and consolidation project in which the partners seek broader benefits.

The strategic objectives that drive a merger include:

• Achieving economies of scale and reducing redundant costs.

• Optimizing operational processes and increasing efficiency.

• Expanding market share and diversifying geographic presence.

• Gaining access to new technologies, specialized talent, or production capabilities.

• Strengthening the financial and competitive structure.

Types of Business Mergers

From a technical-strategic and legal perspective, mergers can be classified in several ways, depending on their corporate structure and the operational relationship between the parties involved.

A. According to their corporate structure

1. Merger by absorption: An existing entity acquires all the assets and liabilities of another, which is dissolved and loses its legal personality.
2. Merger by incorporation of a new company: The participating companies are dissolved and a new company is incorporated, which inherits all the assets of the merged entities.
3. Merger by partial contribution of assets: One company contributes part of its assets to another existing company, strengthening the recipient without altering its legal identity.

B. According to their operational link

1. Horizontal merger: This occurs between companies operating in the same sector or market, with similar products or services. This type of merger seeks to consolidate market share and reduce competition.
2. Vertical merger: Occurs between companies that are at different stages of the value chain (e.g., supplier and distributor), with the aim of optimizing the production chain and reducing logistics costs.
3. Conglomerate merger: Occurs between companies in unrelated sectors, with the intention of diversifying risks and expanding the business portfolio.

Business Merger Process

Executing a merger is a multi-phase process that requires strategic planning, financial analysis, regulatory compliance, and effective change management. Key steps include:

1. Defining corporate strategy: The vision for the merger is established, objectives are determined, and the strategic compatibility between the companies involved is evaluated.
2. Due diligence: Comprehensive evaluation of each organization’s assets, liabilities, contracts, legal obligations, and inherent risks to ensure transparency and mitigate contingencies.
3. Negotiation and structuring of the transaction: Includes agreements on the valuation of the companies, the exchange of shares or cash payment, and the definition of future governance.
4. Regulatory and stakeholder approval: Approval is obtained from competition authorities, shareholders, and other regulatory bodies according to the jurisdictions involved.
5. Post-merger integration (PMI): This involves the consolidation of systems, processes, organizational structures, and corporate cultures. This is one of the crucial determinants of the success of the merger.
6. Monitoring and adjustment: Performance indicators and monitoring mechanisms are established to evaluate the results of the merger and make any necessary corrections.

Benefits and Challenges of Mergers

A. Benefits

Well-planned mergers can offer:

• Economies of scale and reduction of operational redundancies.

• Greater market share and competitive positioning.

• Risk diversification through broader portfolios.

• Access to complementary capabilities, such as talent and technology.

B. Challenges

However, there are also significant challenges, such as:

• Cultural clashes and internal resistance during team integration.

• High costs associated with systems integration and specialized consulting.

• Regulatory risks and approval requirements in competitive markets.

Conclusion

Business mergers are a strategic tool for growth, consolidation, and corporate restructuring with a significant impact on the operational efficiency and competitive positioning of organizations. Their implementation requires detailed planning, technical knowledge of finance and corporate law, and disciplined execution to maximize synergies and mitigate the risks inherent in the process.

Understanding the types of mergers, the stages of the process, and the organizational effects is essential for any executive, corporate advisor, or financial analyst involved in such transactions.

Source:

• https://www.britannica.com/money/merger

• https://estudyando.com/fusiones-empresariales/