Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual steps that need to be successfully completed by two public companies before they are legally combined into a single entity in what is called a merger of equals.

The entire process officially starts with an offer made by one company to another, but both companies will likely be involved in closed door discussions about the proposed merger before any official announcement of a merger proposal are made. Once the merger is officially proposed, the financial details are specified and then distributed to the shareholders of both companies. At this point, the shareholders must vote to approve the merger. Assuming the required votes are obtained from both sides, the merger is typically reviewed by government authorities to determine whether it conforms to antitrust laws. The length of time this process takes can vary considerably from one merger to another depending on the size and complexity of the companies involved and the industries in which they happen to operate.

Because the time between the announcement of a merger and its completion can vary, the companies involved usually announce an expected time frame for completion. Once the merger proposal passes all the necessary hurdles, a precise date of combination is announced which, when reached, legally merges the two companies.


Traders can implement a merger arbitrage trading strategy by buying the stock of the target company involved in the merger, while simultaneously selling the stock of the acquiring company involved in the merger.

  • Arbitrage Trading

    All arbitrage trading strategies are based on profiting from temporary price discrepancies or market inefficiencies. Merger arbitrage trading strategies seek to profit from the temporary price discrepancies that typically occur when a merger or acquisition takes place.

    When a potential acquirer initiates a merger, it commonly bids for the target company at a price higher than the target company's market price prior to the announced merger. This is the price the merged companies will have when the merger is closed.

    The common reaction to a merger announcement is the target company's stock price rising while the acquiring company's stock price falls, with both approaching the merger bid price. However, due to the uncertainty of the deal being consummated, the target company's share price typically remains somewhat below the proposed acquisition price. The spread between the offer price and the target company's share price reflects the market's level of uncertainty regarding the deal going through.

  • Making the Spread

    Whatever the spread is between the offer price and the target company's price at the time the arbitrage trade is made is the profit the arbitrage trader is seeking to lock in. For example, the acquiring company, with its stock trading at $110 per share, makes an offer for the target company, whose stock is trading at $90 per share, of $105 per share. As soon as the merger is proposed, both stock prices typically move toward the offer price. An arbitrager buys the target company's stock and sells short the acquiring company's stock, seeking to profit from a continued narrowing of the spread between the two prices. The trade can be unwound at any point the trader has a net profit between his buy and short-sell trades. If he holds the trade till the merger is complete, he can deliver his target company shares, now converted to acquirer shares, to satisfy his short sale.


Most merger and acquisition (M&A) activities are carried out successfully, but from time to time, you will hear that a deal fell through as either the acquirer, target, or both parties withdrew from the deal. Three of the major reasons that mergers and acquisitions fall through are: regulatory problems, financing problems and problems relating to a company's fundamentals.

Regulatory issues typically involve a violation of government regulations. One important regulation that must be met involves antitrust and monopoly legislation. A merger or acquisition must not significantly affect the role of competition in the specific industry to ensure that the resulting company does not have a monopoly in its industry. For example, if a specific industry only has three companies providing services for the entire country, the U.S. Justice Department's antitrust division may strike down any attempted M&A activity between these three companies.

Financing problems tend to be factors with acquisitions, as opposed to mergers. An acquiring business needs to pay the target company's shareholders in order to buy the company. However, due to the size of the businesses involved, the acquirers often need to pay millions, if not billions, of dollars. In some cases, an acquirer may not be able to come up with enough cash to pay the promised price within an appropriate amount of time. In such an instance, the acquirer will need to withdraw from the deal.

Issues with the company's fundamentals can often occur when an acquiring company conducts more thorough number crunching to search for any red flags or skeletons in the target company's closet. For example, a private equity firm would probably be less interested in acquiring a company whose latest earnings have fallen substantially due to a decrease in demand for the company's products. Another example would be one party realizing that the other company may been participating in options backdating, which could lead to trouble with the Securities and Exchange Commission.


A merger affects the shareholders of both companies in different ways and is influenced by several factors, including the prevailing economic environment, size of the companies and management of the merger process. One purpose of a merger is to improve the wealth of a company's shareholders. However, the conditions of the merger may have different effects on the stock prices of each participant in the merger.

  • Stock Price

    The merger of two companies causes significant volatility in the stock price of the acquiring firm and that of the target firm. Shareholders of the acquiring firm usually experience a temporary drop in share value in the days preceding the merger, while shareholders of the target firm see a rise in share value during the period. The stock price of the newly merged company is expected to be higher than that of both the acquiring and target firms, and it is usually profitable for the target firm's shareholders, who benefit from the resulting stock price arbitrage. In the absence of unfavorable economic conditions, shareholders of the merged company usually experience greatly improved long-term performance and dividends.

  • Shareholder Vote

    The shareholders of both companies may experience a dilution of voting power due to the increased number of shares released during the merger process. This phenomenon is prominent in stock-for-stock mergers, when the new company offers its shares in exchange for the shares of the target company albeit at an agreed conversion rate. Shareholders of the acquiring company experience a marginal loss of voting power, while shareholders of a smaller target company may see a significant erosion of their voting powers in the relatively larger pool of stakeholders.


Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern business environment. The motive for wanting to merge with or acquire another company comes from management trying to achieve better synergy within the organization. This synergy is thought to increase the competitiveness and efficiency of the company.

Mergers usually occur between companies of equal size that believe that a newly-formed company will compete better than the separate companies can on their own. Mergers usually occur on an all-stock basis. This means that the shareholders of both merging companies are given the same value of shares in the new company that they previously owned. Therefore, if a shareholder owns $10,000 worth of shares before the merger, he or she will own $10,000 in shares after the merger. The number of shares owned will change following the merger, but the value of those shares remains the same.

However, mergers are rarely a true "merger of equals". More often, one company indirectly purchases another company and allows the target company to call it a merger in order to maintain its reputation. When an acquisition occurs in this way, the purchasing company can acquire the target company by either using all-stock, all-cash, or a combination of both. When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's balance sheet. The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100%, the minority interest is identified in the liabilities section of the parent company's balance sheet. On the other hand, when a company acquires another company in an all-stock deal, equity is affected. When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company. In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company.


In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term.

The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different.

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.


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US Board of Mergers & Acquisitions