A merger is an agreement to unite two companies into one new company. Mergers are commonly done to join two companies with similar visions, for reducing input costs, increasing profits and eliminating competition.
Mergers affect the major investors of both the companies in multiple ways. The new company is controlled by executives in a manner depending on the kind of agreement that the managements have. However, the stock prices of the new merged entity, always appreciate exponentially.
Once the merger of the two companies is initiated, the stock exchanges are informed about it. Before the merger process completes, shareholders of the acquiring firm typically face a temporary drop in share value, while investors of the target firm observe a rise in share value .
Without any unseen/ unfavorable economic conditions, shareholders of the merged company experience a great rally in their firm’s prices, due to the new strength the company has to take on competition, not just in one country, but across the globe.
The shareholders of both the companies may encounter a dilution of voting power because of an increased number of shares created during the merger process.
After the merger is completed, the new company has a few changes in leadership. Certain compromises have to be made in merger agreements and senior officials of the new company get golden parachutes, .i.e a tidy severance package. Many large teams, such as sales, compliance, accounts, etc. may be done away with as you cannot have two similar teams doing the same things in the same office.
It is a tough situation for many employees as they stand to lose their jobs without it being their fault.
Recently, Vodafone and Idea were merged into one company- Vodafone Idea Limited. This merger will help both the companies to stand together and face competition in the ultra competitive telecom industry. In 2017, the DowDuPont company was formed after the merger of Dow Chemical and DuPont in 2017. After the merger, DowDuPont become the largest chemical company in the world in terms of chemical sales.
In both these cases, the merged entities were able to build a stronger organization and reduce their costs. With a larger organization in place, a company is able to ask for better commercial and payment terms from their suppliers – thus, reducing costs. With one major competitor out of the way, the company is also able to now charge a better price for its products, thus improving profit margins and the overall cash balance of the company.
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