A corporate merger is when one company purchases all of the assets of another corporation. The purchased corporation is absorbed completely into the other company, and nothing remains of the original company. All products and services are sold under the name of the company that purchased the first corporation.
Both parties to a corporate merger must follow specific regulations and laws prescribed for mergers, depending upon the state of incorporation of both entities. Each company must forward a resolution from its board of directors designating how the corporate merger will proceed. One company is designated as the acquiring corporation, while the other is defined as the company being purchased. The merged corporation often uses the name of the acquiring party.
Merger is different from consolidation in that in a corporate merger, one party continues to exist following the transaction, whereas in a consolidation, both parties have consolidated into a newly named corporation. The parties must follow the regulations for mergers in a consolidation, but the end result is different. The legal concerns associated with a merger, such as lack of competition and increased strength in markets, are also issues in a consolidation.
The time frame in which a corporate merger is completed depends upon the jurisdiction as well as the size of the two companies in the merger. Generally, the larger corporation is purchasing the smaller corporation. The process of absorbing the smaller company’s personnel and assets into the larger corporation takes time. The process might proceed in steps. The first set of steps may transfer the assets under the umbrella of the larger corporation, but the assets continue to function as if they are still part of a separate company.
Over time, the assets and personnel of the purchased company are brought into the rest of the larger corporation’s regular business. There might be consolidation of specific departments wherein personnel are laid off due to duplicate efforts. If the two companies are somewhat different, the corporate merger may bring the two companies together without modifying personnel. Generally, the more similar the two companies are prior to a corporate merger, the greater the absorption of the original company is within the second company.
Horizontal mergers are those corporate mergers of two similar companies in the same market. Vertical mergers occur when either a supplier or a customer purchases the other. There are also mergers wherein a portion of a company is purchased or a company that makes a product for a given market buys a company that makes a similar product in another market.