A merger occurs when a company finds a benefit in combining business operations with another company, in a way that will contribute to increased shareholder value. It is similar in many ways to an acquisition, which is why the two actions are so often grouped together as mergers and acquisitions (M&As).
In theory, a merger of equals is where two companies convert their respective stocks to those of the new, combined company. However, in practice, two companies will generally make an agreement for one company to buy the other company's common stock from the shareholders in exchange for its own common stock. In some rarer cases, cash or some other form of payment is used to facilitate the transaction of equity. Usually the most common arrangements are stock-for-stock. While the two processes are similar, don't confuse mergers with acquisitions. While in many cases the distinction between the two may be corporate politics and semantics, there are a lot of blue chips that make quite a few acquisitions while maintaining relatively low volatility. As a general rule of thumb, if the corporate leadership of the company in which you own a stake doesn't change much, it is probably an acquisition. However, if your company experiences significant restructuring, we're looking more along the lines of a merger.
Understanding the Buyout Circumstances
The circumstances of a buyout can also be very important. The investor should get to know the nature of the merger, key information concerning the other company involved, the types of benefits that shareholders are receiving, which company is in control of the deal and any other relevant financial and non-financial considerations.
While it may seem counterintuitive, owning the company that's being bought out can be a real windfall for investors. That's because if the company being bought has shown respectable performance and has good prospects for the future, a certain amount of goodwill may be involved.Goodwill usually accounts for intangible assets, though if those assets weren't factored into the stock price when you purchased your shares of the company being bought, you can end up on top. Goodwill is a source of confusion for a lot of people, but essentially what it amounts to is the amount of money a company pays over the book value of another company to purchase it. And let's not forget that because intangible assets aren't always easily valued, you can expect that a certain phantom percentage of most companies that have goodwill on their balance sheets may be overvalued. While that's not a good deal for the guy who owns a few shares of the purchasing company, if you own the company being bought, this can be another win for you.
Importance and Consideration Regarding Your Vote
Keep in mind that a company's decision to merge with another company is not necessarily set in stone. If you're a shareholder in the company, the decision about whether to merge with another company is partially yours. The typical voting scenario for a publicly-held company will usually end with a shareholder vote on the issue of the merger. If your analysis and consideration tells you that a merger is a step in the wrong direction or if it tells you that it might be a great financial opportunity, voting with your shares is the best way to exercise your power over the decision-making process.In someones opinion> ISO.
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