Mergers refers to when two more entities come
together to form a one entity. Thus, all assets and liabilities of the old
entities become assets and liabilities of the new entity and shareholders of
the old entities become shareholders of the new entity.
Mergers
may take two forms:
·
Merger through Absorption:
An absorption is a combination of two or more
entities into an 'existing entity'. All entities except one lose their identity
in such a merger. For example, absorption of Tata Fertilisers Ltd by Tata
Chemicals Ltd. Tata Chemicals, an acquiring company, survived after merger
while Tata Fertilisers, an acquired company, ceased to exist. Tata Fertilisers
transferred its assets, liabilities and shares to Tata Chemicals.
·
Merger through Consolidation:
A
consolidation is a combination of two or more entities into a 'new entity'. In
this form of merger, all entities are legally dissolved and a new entity is
created. Here, the acquired entity transfers its assets, liabilities and shares
to the acquiring entity for cash or exchange of shares. For example, merger of
Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd
and Indian Reprographics Ltd into an entirely new entity called HCL Ltd.
Also,
there are three major types of mergers:-
·
Horizontal merger:
It refers
to the merger of companies who are direct competitors of one another. They
serve the same market and sell the same product.
·
Vertical merger:
It is a combination of two or more firms
involved in different stages of production or distribution of the same product.
It may take the form of forward or backward merger. When a company combines
with the supplier of material, it is called backward merger and when it
combines with the customer, it is known as forward merger.
·
Conglomerate merger:
It refers to the merger of companies, which
do not either sell any related products or cater to any related markets. Here,
the two companies entering the merger process do not possess any common
business ties.
