What is it called when two or more companies join together and form an entirely new company?

If you listen to the news or pay attention to business, you are aware of the �merger mania� that has been occurring in the U.S. over the past decade. What exactly is a merger and how does it differ from an acquisition? The details can become overwhelming, but we will try to come up with some basic definitions and discuss some general ideas.

Merger: When two companies combine to form one new company. There is nothing left of the combining companies.

Acquisition: When one company buys another and it becomes part of the buying organization.

There are other forms of business combinations, such as joint ventures, and consortia.

A joint venture is when two or more separate companies form a third business that is controlled and owned by the others (called the parent organizations).

A consortium is when many companies pool their resources to solve one problem. For example, many pharmaceutical companies may put their money together to work on an R&D project that provides all the companies with the results.

Why do mergers and acquisitions (M&A) occur?

The big reason these business combinations occur is because companies are looking to control uncertainty. Can you think of some areas of uncertainty that can be reduced through a merger or acquisition? Think about where companies get their supplies, where their competition comes from, and how they can reduce the effects of an ailing business.

For example, if a company wants to make sure that its source of supplies is guaranteed (as much as possible) to them rather than competitors, they can buy it. This is called vertical integration; a company tries to control the vertical process of its business. If we make tires and want to make sure that our supply of rubber is there when we need it, we can buy a rubber manufacturing company. This would be vertical integration. Another example of vertical integration is controlling the distribution process of our company. Using the same tire example, we would this time buy the retail or wholesale companies that sell our products. Or if we don�t have our own shipping fleet, we would get one.

Can you think of examples for the other two suggestions? Which one is horizontal integration?

How is the government involved in M&A?

One way that government becomes involved in M&A is through antitrust laws.

Antitrust Laws: The Sherman Act was established in 1890, which was the first national antitrust law to regulate monopoly and monopoly power. Other similar laws, such as the Clayton Act, followed over time. Antitrust laws are designed to promote competition. AT&T was broken up into the Baby Bells under antitrust legislation. Many large-scale mergers and acquisitions are reviewed and sometimes stopped under antitrust laws. Antitrust laws also prohibit any type of inter-company agreements that promote monopoly power.

In essence, anytime a merger or acquisition has the opportunity of decreasing competition, the government steps in and stops it. Can you think of an example of a recent merger that was stopped by the government? Why do you think it was stopped?