What Is a Merger of Equals?
A merger of equals is when two firms of about the same size come together to form a single new company. In a merger of equals, shareholders from both firms surrender their shares and receive securities issued by the new company. Companies may merge to gain market share or expand into new segments of their existing market. Usually, a merger of equals will increase shareholder value.
- A merger of equals is the process of two similarly sized companies joining together to form one company.
- The benefits of a merger of equals include increased market share, reduced competition, the creation of synergies, and expansion into additional markets.
- The joining of two different corporate cultures is a difficult aspect of a merger of equals and must be handled swiftly and decisively at the onset.
- There is an important distinction between a merger of equals and an acquisition.
Understanding a Merger of Equals
When two companies decide to combine in a merger of equals, they do so to improve the standing of both of their businesses. A merger of equals results in a reduction of costs, the creation of synergies, and a reduction in competition, as the two companies are no longer competing for the same market share.
Oftentimes it is difficult to create a merger of equals, as two companies are not truly equal. One is always better placed than the other. However, there are significant legal and technical processes to help create a merger of equals.
Typically, the board of directors of the new company consists equally of members from each individual company. There is also an agreement on power-sharing between the two executives. The merger is structured as a "stock-for-stock tax-free exchange," where shareholders keep the same ownership. The most difficult aspect of a merger of equals, or any merger, is trying to combine two different corporate cultures into one.
Transition in a Merger of Equals
As combining two different corporate cultures is a difficult task, at the outset, both companies need to define the various roles, strengths, and weaknesses of both companies that will come into play in the new entity. Executive roles need to be clearly stated; who will lead the firm, who will lead certain divisions, and the responsibilities these roles will entail. This has often been difficult in mergers of equals, as ego, loyalty, and corporate politics come into play. For a successful merger, emotions and desires need to be put on the back burner while fact and logic take the wheel for the betterment of everyone involved.
It's important to make these transitional decisions quickly, to avoid impeding business operations, the slowing down of sales, and any other adverse impacts a stalemate might have.
Defining the New Entity
Combining two different cultures is a significant challenge. Leaders must redefine the company by focusing on cultural characteristics that align. Culture is one of the most significant factors that can doom a deal, and it’s hard to get right.
The perfect example is that of the merger between AOL and Time Warner that created AOL Time Warner. The new company combined the culture of AOL, which was young and part of the dotcom boom, whereas Time Warner was older, larger, and a traditional media company. The cultures clashed and AOL Time Warner was eventually split.
Once a merger closes, employees are often left in the dark as to how the new company will proceed or if their jobs are in danger due to any redundancies that could lead to layoffs. It's important for leadership to define the purpose of the new company, its direction going forward, the strengths and benefits of the merger, and how this will positively impact employees. Though it is important to keep employees enthusiastic, it's also important to be truthful to them and manage their expectations.
A Merger of Equals vs. an Acquisition
A merger of equals is not the most accurate definition of a merger. Most merger activity, even friendly takeovers, sees one company acquire another. When one company is an acquirer, it is proper to call the transaction an acquisition. Because one company is the purchaser and the other is for sale, such a transaction cannot be viewed as a merger of equals.
Acquisitions can be friendly—where the target business agrees to the takeover—or may be forced against the will of the target company, known as a hostile takeover. Once one entity holds more than 50% of the target firm's shares and assets, they can gain control of the direction of the business.
For example, the creation of DaimlerChrysler saw both Daimler-Benz and Chrysler end individual operations and form one company, DaimlerChrysler. At the time it was presented as a merger of equals because a new company was formed. However, only two years later, Jürgen Shrempp, CEO of Daimler-Benz, had forced out Robert Eaton, the CEO of Chrysler. And Daimler-Benz had bought 80% of Chrysler in the merger. Eaton would later say that the term "merger of equals" was used for "psychological reasons" to make the deal attractive to Chrysler and it was really an acquisition. The two companies separated a few years later.