A merger involves the combination of two separate legal entities into one new entity. It can occur in a variety of ways, including a stock acquisition or a cash purchase. Its purpose is to increase shareholder wealth by improving financial performance and enhancing value. A successful merger requires a well-conceived strategy with clear goals and milestones, competent transition teams, and effective execution. Insufficient attention to these factors can diminish the gains that shareholders expect to reap from a Merger.

Mergers are subject to regulatory review, and the federal government can block a deal if it fears the new company will form a monopoly or lessen competition in the marketplace. Companies must also weigh the merits of the deal and its potential impact on their reputation. For example, if a merger is so ambitious that it strays from the original strategy, the new entity may end up with a reputation as a “me-too” brand.

One major risk involved in a Merger is overpaying for a target company. For example, if Company A is unduly bullish about the prospects for Company B, it might offer a very high premium to acquire it. However, Company B’s product development may fall short of expectations, or a critical component in a product may turn out to have severe side effects.

Mergers can also create unfavorable tax consequences. For instance, a tax-free merger is only possible in cases where the companies are in the same business sector or close to it. Otherwise, both the acquiring and target companies pay a corporate tax on their gains from the transaction.