Merger

Merger is a friendly combining of two companies. In most cases the boards of directors of the two companies discuss the mutual benefits of such a combination and then recommend the plan to shareholders for approval. Usually one company exchanges its stock for the stock of the other, which is then retired. The relative market price of the two companies’ stock determines the exchange rate of shares. Occasionally, cash or a combination of cash and stock may be exchanged. This decision is usually mutual between both firms. In most cases, at least 50% of the shareholders of the target and the bidding firm have to agree to the merger. The target firm ceases to exist and becomes part of the acquiring firm. For instance Digital Computers was absorbed by Compaq after it was acquired in 1997.