In a Merger, two companies combine to form one company. The new entity has the assets, liabilities, and operations of both the original and acquired companies. Mergers are usually funded with cash, equity (stocks), or a combination of both. Stockholders of the original companies receive stock equal in value to their old shareholdings in the resulting company. Mergers allow companies to expand their product offerings, enter new markets, strengthen customer relationships, or improve their financial health by increasing revenue and decreasing operational costs.

The most common reason for a merger is to make more money. If the combined revenues of the two companies are greater than the market capitalization of their stock when they were separate, then shareholders will benefit from the transaction. Similarly, if the combined revenue of the two companies is less than the market capitalization of their stock when the deal was announced, then stockholders will lose money on their investment.

A merger can also be done to improve management or company culture. However, this is a risky move because the cultural alignment of the companies must be very good. Differences in work ethic, communication styles, and other cultural issues can lead to the failure of a deal.

Governmental regulatory agencies must approve mergers to ensure that the companies involved are not forming a monopoly or lessening competition in the industry. These regulatory agencies typically require that a company has a valid motive for the deal before they will allow it to proceed.