Merger is the coming together or amalgamation of two or more firms to form one new company. The old firm will lose its identity and the new company will emerge with a new name. It connotes a transfer of properties and liabilities of one or more companies to another. By merging, the firms will grow in size and maintain large scale production.
Reasons for Merger
- To Eliminate Competition: Some mergers are motivated by the desire to lessen the rigours of competition.
- Acquisition of Technical Know-how: A large company may acquire a smaller one in the same trade for the purpose of obtaining needed patent or the technical know-how owned by the latter.
- Diversification: This involves one corporation merging with another in a totally unrelated line of business just to diversify and reduce risks.
- Guaranteed Supplies or Outlet: A company may seek to assure itself of an adequate supply of an essential item by merging with such firm.
- Tax Saving: The reduction of federal income tax liabilities sometimes is an important reason.
- Large Scale Production: By coming together, the combination of greater resources may help in securing economies of large scale production.
- Opportunity of Raising More Capital: Merger provides and enhances the opportunity of having or raising larger resources.
- To Obtain Larger Share of the Market: Merger of firms affords the opportunity of obtaining a large share of the total market for a product.
- To Prevent Liquidation: Merger can take place to prevent the liquidation of a failing company.
Procedures for Merger
1) The board of each firm is required to adopt a resolution approving the merger. This will set out the following:
- Names of the combining firms and the name that will be adopted.
- Terms and conditions of proposed merger.
- Method and bases for converting securities.
2) The merger plan must be approved by a two-third shareholders of both firms.
3) All necessary documents are to be submitted to the appropriate office.
4) If all the documents are in proper form, the registrar issues a certificate of merger.
Effects of Merger
- The firms become a single one.
- All combining parties cease to exist.
- The new corporation possesses all the rights, privileges and powers of the combining corporation.
- The new company acquires all the properties (assets).
- The new company acquires all debts (liabilities) and obligations.