What is a 'Merger'
A merger is a deal to unite two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Most mergers unite two existing companies into one newly named company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.
BREAKING DOWN 'Merger'
In 2015, there was a record $4.30 trillion worth of mergers and acquisitions announced. Deal making continues to be a popular way to grow revenue and earnings for companies of varying size. Mergers are most commonly done to gain market share, expand to new territories, and unite common products.
Types of Mergers
There are five main types of company mergers:
• Conglomerate: nothing in common for united companies
• Horizontal: both companies are in same industry, deal is part of consolidation
• Market Extension: companies sell same products but compete in different markets
• Product Extension: add together products that go well together
• Vertical Merger: two companies that make parts for a finished good combine
Examples of Mergers
Anheuser-Busch InBev is an example of how mergers work and unite companies together. The company is the result of multiple mergers,
consolidation, and market extensions in the beer market. The newly named company is the result of the mergers of three large international beverage companies. Anheuser-Busch InBev is the end result of uniting Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States). Ambev merged with Interbrew uniting the number three and five largest brewers in the world. When Ambev and Anheuser-Busch merged, it united the number one and two largest brewers in the world. This example represents both horizontal merger and market extension as it was industry consolidation but also extended the international reach of all the combined company’s brands.
The largest mergers in history have totaled over $100 billion each. In 2000, Vodafone acquired Mannesmann for $181 billion to create the world’s largest mobile telecommunications company. In 2009, AOL and Time Warner merged in a $164 million deal that is considered one of the biggest flops ever. In 2014, Verizon Communications bought out Vodafone’s 45% stake in Vodafone Wireless for $130 billion.
Due to the large number of mergers, there is even a mutual fund that gives investors a chance to profit from the deals. The fund captures the spread, or amount left between the offer price and trading price. The Merger Fund from Westchester Capital Funds has been around since 1989. The fund invests in companies that have publicly announced a merger or takeover. To invest in the fund, a minimum amount of $2,000 is required, and the fund does charge a higher 1.7% expense ratio. Since its inception, the fund has returned an average of 6.3% annually.