Mergers of equals: What is it and how does it work?

Last Updated on 27th June 2024

Business is full of complex transactions, negotiations and agreements. Mergers of different types happen all the time and are seen as a normal part of business culture. The most well-known merger is when a larger company takes over a smaller one.

A different type of merger is a merger of equals. Mergers of equals are a contentious business issue as some professionals believe it is impossible to be truly equal. Let’s delve into what they are, why companies do them, how they work and how they affect management.

What is a merger of equals?

Mergers of equals are when two firms of roughly the same size join together to form a single company. In other mergers and acquisitions, larger companies tend to take over smaller ones which makes them acquisitions rather than mergers. This is where a merger of equals is unique.

There are many benefits to a merger of equals. Usually, businesses will see an increase in their market share. It is also a great opportunity to diversify their offerings and utilise the expertise of both former companies.

Business professionals analyzing data and documents in a meeting room

How does the process work?

Mergers of equals require careful planning and execution. The first step is the diligence process. This is where both companies can assess the merger and see if it is viable. Assessing the valuation is important too, so having a team of experts on board is crucial to make sure everything is above board.

Once both companies have agreed the merger can go forward a merger agreement will be drafted. This document outlines the terms and conditions of the move and is considered a legally binding agreement.

Next, the integration process can begin. To reduce disruption to business operations, this integration must be done as quickly as possible whilst still taking care to complete it properly. Once the merger is finished, the two entities are unified as one new entity.

A boardroom meeting with diverse board members 1

Management and board of directors

Most companies have a board of directors, and they will need to find a way to merge in light of the new company status. Usually, the new board will be comprised of an equal number of members from each merging entity. Sometimes other agreements are made which will be put into a legally binding document.

As the two companies will have two CEO roles, there can only be one that becomes CEO of the new company. This will have been discussed and agreed early on in the merger process. It may be that the unsuccessful CEO takes a different role or leaves the company altogether. Sometimes it may be best for the new company that a round of interviews take place across the company for different roles, meaning the best people are in strategic places. This can include the CEO role.