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Wednesday, 12 February, 2003, 19:03 GMT
How do mergers happen?

Corporate mergers occur when two companies combine. In some cases both companies want to merge. This is called an agreed merger.

Another situation is where one company seeks to control another without its agreement. This is called a hostile takeover.

To avoid a hostile takeover the target company may seek a 'white knight', another company with which it would prefer to merge.

It is up to the shareholders of the target company to approve a merger. They will usually do so if it is recommended by the board, or if they stand to make a substantial profit from the shares in the new company.

A company can offer either shares in its own company or cash to shareholders in order to persuade them to sell out.

In a 'dawn raid' the acquiring company snaps up a substantial block of shares in the target company at the opening of the trading day - before the bid is known and speculation can push up the value of those shares.

Why do mergers happen?

There are many motivations for mergers.

One reason is expansion: a larger, growing company may try to take over its smaller rivals in order to grow bigger.

In some cases it is the smaller company that wants to expand, but is hampered by lack of capital. It seeks a larger partner who will put in the necessary investment.

Other mergers seek to make cost-savings by integrating operations, sometimes on a world scale.

And some mergers are defensive, responding to other mergers which threaten the competitive position of a company.

When do mergers happen?

Mergers tend to happen in waves.

A stock market boom makes mergers much more attractive because it is relatively cheap to acquire other companies by paying for them in (high valued) shares.

But falling share prices can also lead to a company being undervalued and hence an attractive acquisition.

Some industries are forced into mergers by specific troubles facing that industry.

Globalisation and the regulatory environment also have a big impact on the likelihood of consolidation.

And the problems?

Mergers can fail because the two partners cannot agree terms - for example, who will run the new company.

Mergers can also run into regulatory problems. Governments may be concerned that the merger might create a monopoly, and either block it or require the merged companies to sell some of the firms which are part of their business empire.

Finally, mergers may not produce the kind of benefits promised. Cost savings may fail to materialise, for example.

Some academic studies have suggested that whatever the immediate benefit to shareholders, mergers rarely give much added value to the economy as a whole.

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