Companies do great on their own but with time, the management or ownership may find reasons to believe they would be better off if they merged with another company. This kind of union is referred to as mergers.

However, not all company mergers are the same. There are various types of mergers and one special type is a Merger of Equals.

What is a Merger of Equals?

A Merger of Equals refers to the combination or unionization of two companies – considered to be of equal size – to become a new single company. It is not to be confused with other forms of mergers.

The underlining factor in this kind of merger is that, both companies must be, to some extent, of equal size. None of both companies is considered as the acquirer or the target as is the case of other mergers. In this type, it is not the case of a buyer and a seller but can be viewed as a marriage between companies.

A typical example can be taken from the formation of DaimlerChrysler. Formerly, Daimler-Benz and Chrysler were two separate companies but when they decided to merge, none of these companies has existed afterwards. They formed the new single company which is known as DaimlerChrysler.

During a merger of equals, the various shareholders of both companies will relinquish their shares in the old companies and then receive or accept the securities issued by the new company that has been formed.

Any form of unionization which involves the acquisition of one firm by the other or consolidation of one firm into the other cannot be regarded as a merger of equals.

What does it mean for the companies?

There is a legal and financial framework that guides the unionization of two companies that involves no acquisition. Obviously, some level of sacrifices will have to be made by both companies but as much as the framework is concerned, it ensures that both companies are treated as equally as possible with regards to technical matters.

One of the ways the framework ensures this equality is the appointment of company directors. When choosing the board of directors of the new company, an equal number of directors are chosen from each of the old company’s board.

Also, the chief executives of both companies are engaged in a typical power-sharing arrangement so that there’s some level of evenness among them.

For the shareholders, giving up their rights in the former shares and receiving the shares of the new company is treated as a tax-free stock-for-stock exchange.

Challenges in Merger of Equals

Sometimes there is the challenge of how to determine to which extent two companies can be considered equal. The question of what criterion is used for defining equality remains to be answered.

What if one company makes a billion dollars annually and has 7000 employees whiles the other makes a similar income but has less employees and more capital? Negotiations may come to a stalemate over debates about the level of equality between them.

Even as mergers are created to create synergy and economies of scale, they are likely to result in loss of some highly skilled workers – apart from those in executive positions – and there is the possibility for duplication of jobs within the organization too.