The last two decades have seen a number of corporate mergers or unions. Mergers can be evaluated in the same way as any other investment. As long as the merged firms are worth more combined than when alone, the net present value of the fusion is profitable and shareholders are better off. Financial managers need to know under what conditions it is worthwhile to merge with another firm.

The chapter starts with reasons why companies merge. The motives for mergers include both those, which make sense, and those, which do not. This is followed by coverage of the benefits and costs of mergers and how these are evaluated. The chapter also provides summary coverage of the legal, tax, and accounting issues. A number of examples of recent merger activities are described with a discussion of defensive tactics adopted by companies opposed to being taken over. The last section discusses the benefits and costs of mergers to the economy in general and the effect of the threat of a takeover on corporate management.

Mergers can be the result of a hostile takeover or a friendly union. In either case, mergers typically result in a change of ownership and control. Even in the so-called mergers of equals, one can see that one company’s management dominates the post-merger firm. Thus, merger activities are part of a broader market for corporate control. This market includes not only mergers, but also spin-offs and other restructuring activities, which change the structure of the corporation and provide the right incentives for managers. These and related issues are discussed in greater detail in the next chapter.