Merger of Equals: What it is, How it Works

What Is a Merger of Equals?

A merger of equals occurs when two similarly sized firms come together to form a single new company. Shareholders from both firms surrender their shares and receive securities issued by the new company. Companies merge to gain market share or expand into new segments. A merger of equals usually increases shareholder value.

Key Takeaways

• A merger of equals is when two similarly sized companies join together to form one company.
• The benefits of a merger of equals include increased market share, reduced competition, creation of synergies, and expansion into additional markets.
• The merging of two different corporate cultures is a challenging aspect of a merger of equals and must be handled swiftly and decisively.
• There is an important distinction between a merger of equals and an acquisition.

Understanding a Merger of Equals

When two companies decide to merge as equals, they aim to improve the standing of both businesses. This type of merger reduces costs, creates synergies, and eliminates competition for market share.

Creating a merger of equals is difficult, as the two companies are never truly equal. However, legal and technical processes exist to facilitate their combination.

The board of directors of the new company typically consists of an equal number of members from each individual company. Power-sharing between the two executives is also agreed upon. The merger takes the form of a "stock-for-stock tax-free exchange," allowing shareholders to maintain the same ownership. The most challenging aspect of a merger of equals, as well as any merger, is the integration of two different corporate cultures.

Transition in a Merger of Equals

Combining two corporate cultures is a difficult task. Both companies must define the various roles, strengths, and weaknesses that will come into play in the new entity. Executive roles need to be clearly stated, including who will lead the firm and certain divisions, and the assigned responsibilities. This has often proved challenging due to ego, loyalty, and corporate politics. A successful merger requires the temporary suppression of emotions and desires in favor of logical decision-making.

It is crucial to make these transitional decisions quickly to avoid impeding business operations, sales, or any other adverse impacts resulting from a stalemate.

Defining the New Entity

Combining different cultures presents a significant challenge. Leaders must redefine the company by focusing on cultural characteristics that align with the multicultural organization. Culture is a crucial factor that can undermine a deal, and getting it right is difficult.

An illustrative example is the merger between AOL and Time Warner that created AOL Time Warner. The new company combined AOL’s young, dotcom boom culture with Time Warner’s older, more traditional media culture. The clash of cultures eventually led to the split of AOL Time Warner.

Once a merger is finalized, employees often lack clarity about the future of the new company and whether their jobs are at risk due to redundancies that could result in layoffs. Leadership must define the purpose of the new company, its direction, the strengths and benefits of the merger, and how it will positively impact employees. While it is important to maintain employee enthusiasm, it is equally important to be truthful and manage their expectations.

A Merger of Equals vs. an Acquisition

A merger of equals does not accurately describe most mergers. In most cases, one company acquires another. When one company is the acquirer and the other is for sale, the transaction is considered an acquisition. A merger of equals implies that both companies have an equal say in the transaction.

Acquisitions can be friendly, with the target business agreeing to the takeover, or forced against the target company’s will (known as a hostile takeover). Once one entity holds over 50% of the target firm’s shares and assets, it gains control of the business’s direction.