A business merger involves the combination of two or more companies in a strategic transaction that results in the new company having ownership of all the assets and equity shares of both original entities. This type of transaction allows companies to grow more quickly and compete more effectively with larger rivals by increasing their market share and obtaining valuable products, technology, intellectual property or customer lists. However, it also requires companies to deal with the issues of integrating operations and cultures and often brings regulatory scrutiny, especially when the merger creates a potential monopoly.
Some of the most successful mergers in history are conglomerate acquisitions that combine companies that operate in different industries at the same stage of production, such as a cable TV provider combining with a satellite television company to gain access to new markets. This type of business deal allows the acquiring firm to gain efficiencies and lower production costs.
Other types of business deals are horizontal and vertical mergers, which occur when two companies in the same industry make a strategic decision to reduce competition, enter new markets or acquire valuable assets and technology. For example, the “mega-merger” between Exxon and Mobil established one of the largest oil companies in the world.
The valuation of a business can be complicated, but discounted cash flow analysis is an excellent way to evaluate a target company and set an appropriate price. Generally, a value of a target is determined by determining the present values of future cash flows – with synergies and taxes given special consideration – and discounting them to today’s dollars.
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