Merger – Definition

Cite this article as:"Merger – Definition," in The Business Professor, updated May 30, 2019, last accessed October 21, 2020,


Merger Definition

A merger simply refers to an agreement between two companies to come together and become a new entity. When two existing companies consolidate or unify to become one new company, merger has occurred. Although, different types of merge exist, usually, either of both companies close up and become one of one company is incorporated into another.

Mergers often occur when businesses want to expand their operations and relevance. Usually, two companies with the same size, in the same industry and similar goals agree to become one in mergers. Mergers are done to have a larger share in the market and to also create bigger values.

A Little More on What is Merger

When two companies voluntarily agree to consolidate or fuse together, it is merger. In mergers, there are legal processes that must be duly followed and completed before a merger can be said to have taken place.

Fusion can occur between two companies with equal customer base, equal size of shareholders, similar modes of operations, similar goals, among others. The desire to gain more market territories, more profits, wider customer base and reach, wider scales of operations often inform the decisions of companies who engage in mergers. About $4.30 trillion worth of Mergers and acquisitions took place in 2015.

Types of Mergers

Five types of Mergers exist, they are:

  1. Congeneric: This type of merger occurs when companies within the same sector but performs interconnected functions voluntarily decide to come together and form one new entity. Congeneric merger is also called a product extension merger. When two existing product lines are fused together or when a new product line is added to an existing one, congeneric merger has occurred.
  2. Market Extension: Two companies that manufacture similar products of two firms that offer similar services but in different markets can decide to consolidate and become one new entity. This is a form of market extension.
  3. Conglomerate: This type of merger occurs between two companies with unrelated activities or operations. The merger between  Walt Disney Company and the American Broadcasting Company (ABC) in 1995 is an example of conglomerate merger. It occurs when two firms with no similar traits or operations become one.
  4. Vertical: this type of merger occurs between two firms that offer different services within the same industry or along the same supply chain. Two companies that produce different parts of the same product can form a synergy, combine manpower to become one new entity.
  5. Horizontal: this merger can occur between two firms, within the same industry, producing the same goods and offering the same services. This type of merger often occur between small-size businesses that agree to come together to form a larger entity.

Examples of Mergers

Quite a large number of Mergers have taken place over the years, in diverse industries, sectors and in diverse countries. The largest mergers in history worth over $100 billion each.

There are examples of successful mergers, where the new entity is still relevant. Anheuser-Busch InBev is a product of Mergers that occurred between Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States). There are three large international beverage companies that decided to consolidate and become a new entity. Each of these companies have large customer base and wide reach but they decided to merge and become a formidable team.

Furthermore, AOL and Time Warner vertically merged in a $164 million deal in 2000, Vodafone also acquired Mannesmann for $181 billion in 2000.

References for Merger

Academic Research on Merger

Observation of gravitational waves from a binary black hole merger, Abbott, B. P., Abbott, R., Abbott, T. D., Abernathy, M. R., Acernese, F., Ackley, K., … & Adya, V. B. (2016). Physical review letters, 116(6), 061102.

Merger motives and merger prescriptions, Trautwein, F. (1990). Strategic management journal, 11(4), 283-295.

What drives merger waves?, Harford, J. (2005). Journal of financial economics, 77(3), 529-560.

Merger rates in hierarchical models of galaxy formation, Lacey, C., & Cole, S. (1993). Monthly Notices of the Royal Astronomical Society, 262(3), 627-649.

Merger bids, uncertainty, and stockholder returns, Asquith, P. (1983). journal of Financial Economics, 11(1-4), 51-83.

The gains to bidding firms from merger, Asquith, P., Bruner, R. F., & Mullins Jr, D. W. (1983). Journal of Financial Economics, 11(1-4), 121-139.

Market valuation and merger waves, Rhodes‐Kropf, M., & Viswanathan, S. (2004). The Journal of Finance, 59(6), 2685-2718.

Monopoly and oligopoly by merger, Stigler, G. J. (1950). Monopoly and oligopoly by merger. The American Economic Review, 23-34.

A pure financial rationale for the conglomerate merger, Lewellen, W. G. (1971). The journal of Finance, 26(2), 521-537.

Oligopoly and the incentive for horizontal merger, Perry, M. K., & Porter, R. H. (1985). The American Economic Review, 75(1), 219-227.

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