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What is a Merger of Equals?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 September 2016
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A merger of equals is a situation in which two firms of roughly the same size choose to combine into a single business entity. This is different from mergers in which one company is identified as the acquiring entity and the other as the acquired business operation. When this merger of equals takes place, both companies effectively cease to exist, all their assets are rolled into the new combined corporation, and shareholders form both businesses receive new securities in exchange for surrendering their older shares.

In some instances, a merger of equals is referred to as a pure merger. This is because one business is not being absorbed into the operation of a different company. With other types of merger and acquisition situations, one of the two businesses involves ceases to exist, since all its assets are now the property of the acquiring company. Unlike a merger of equals, the shareholders of the acquired company surrender their shares and are granted shares issued by the acquiring business, rather than shares for a completely new business enterprise.

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With this type of merger, the two businesses agree to the merger and take steps to systematically achieve the goal of a combined company. This is different from a hostile takeover, in which one business gains control over another company without the consent of the acquired company. It is also somewhat different from a friendly takeover, where a business is open to being acquired by another company, with the understanding that the acquisition means that the acquired company will no longer exist in the same form.

It is not unusual for two companies that conduct a merger of equals to establish a new company name that includes at least some references to the names of the two companies that are coming together as one. For example, if A Company merges with B Company, the new business entity may go with a name like AB Corporation. This approach is often utilized when both companies enjoyed a positive reputation among consumers and in the investment community.

Rather than taking on a name that consumers and investors would not immediately associate with those stellar reputations, the newly combined company goes with a name that keeps those reputations intact. Doing so often has the effect of enhancing those previous reputations and generates a great deal of excitement in the business community. The idea behind carefully drawing on elements of the two previous names is to maintain the goodwill enjoyed by each business before the merger of equals took place. At the same time, the right name sends the clear message that the newly combined company offers all the benefits that were available before, as well as some new ones that were not possible before the completion of the merger.

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