How Do Business Mergers Work?

wondrium details the nuts and bolts of mergers and acquisitions

By Jonny Lupsha, Wondrium Staff Writer

A merger is when two businesses combine to become one. Mergers can be friendly or “hostile,” in which the target company has little to no say in the matter. How do businesses come together in a merger or acquisition?

business people having business agreement in signing ceremony in boardroom
Mergers and acquisitions are part of daily life in the business world. Photo by Mongkolchon Akesin / Shutterstock

Exxon and Mobil, two, giant energy companies, merged in 1999 to become ExxonMobil, a superpower in the energy industry. As of 2022, they have over 12,000 gas stations in the United States—nearly 2,000 in Texas alone. It’s been called one of the biggest and most successful business mergers in history.

We’ve all seen this happen in many industries over the years and film is no different. In 2023, the horror genre will experience its biggest merger in recent memory when Blumhouse Productions, who helped make the Paranormal Activity series and Get Out, merges with Atomic Monster Productions, who produces films for The Conjuring Universe series.

Mergers and acquisitions are regular parts of the business world. What happens in a business merger? In the video series Critical Business Skills for Success, Dr. Michael A. Roberto, Trustee Professor of Management at Bryant University in Smithfield, Rhode Island, analyzes the many facets of combining two companies into one.

Mergers and Acquisitions

“A merger is when two firms come together to form a new, combined entity,” Dr. Roberto said. “An acquisition is when one company purchases another and takes charge. In almost every case, one management team takes charge and begins to assert its authority over the managers in the other company.”

Dr. Roberto also pointed out that whether two companies merge at a more even level or a larger company simply acquires a smaller one and absorbs it, there’s an important distinction between a friendly takeover and an unfriendly one. In a friendly deal, the company being purchased is amicable and open to the company doing the purchasing.

In an unfriendly takeover, the larger company goes straight to the shareholders of its targeted firm without the managers’ or board’s consent and convinces the shareholders to sell, even if the targeted firm’s highest employees don’t want to sell.

Putting the Numbers Together

How does a business merger work?

“Let’s suppose that the stock price of a target firm, a firm that’s been acquired, trades at x dollars per share,” Dr. Roberto said. “The acquiring firm tends to pay a significant premium over x dollars per share when they do the deal, sometimes 20-40% more than the shares are currently trading at in the market.

“The acquiring firm must believe that somehow this unit will now be more valuable as part of their corporation than it was as an independent entity.”

Who benefits the most in mergers and acquisitions? The shareholders are clear candidates, since they receive payment in the full amount of their stock value plus an additional 20 to 40 cents on the dollar. If the acquiring firm can make good on its merger or acquisition, they also benefit from the synergy of the two companies.

“Sometimes we read about two large companies, like Daimler and Chrysler, and they articulate the notion that it’s a merger of equals, [or] two equal parties coming together to form a new, exciting company,” Dr. Roberto said. “In reality […] it’s almost always the case that it’s not, in fact, a merger of equals.”

Blumhouse and Atomic Monster, whose studio heads seem to complement each other almost perfectly, may be a rare exception.

Critical Business Skills for Success is now available to stream on Wondrium.

Edited by Angela Shoemaker, Wondrium Daily