Megamerger

What Is a Megamerger?

A megamerger is an agreement that unites two large corporations, typically in a transaction worth billions of dollars, into one new legal entity. These deals differ from traditional mergers due to their scale, hence the inclusion of the word mega.

Megamergers occur through the acquisition, merger, consolidation, or combination of two existing corporations. Once complete, the two companies that team up may maintain control over a large percentage of market share within their industry.

Understanding a Megamerger

Adding the word mega to merger implies the combination of two large corporations. These companies are generally already market leaders in their fields, yet thirst to become even bigger.

A megamerger may be executed to extend the two company’s reach, keep competitors at bay and save money and boost profitability through economies of scale — the concept that selling goods in larger quantities reduces production costs.

Megamergers must overcome several hurdles to get over the finishing line, though. First, approval is needed from both the individual company’s board of directors (B of D) and shareholders. Once this is achieved, they then have to convince the government that their plans won’t be detrimental to the economy. 

Megamerger Requirements

In the U.S., regulators that have jurisdiction over mergers include the Department of Justice’s (DOJ) antitrust division, the Federal Trade Commission (FTC), and, in cases involving broadcasters and media companies, the Federal Communications Commission (FCC). Companies with multinational operations also often must receive approval to combine from the European Union’s (EU) Commission.

Important

Many megamergers are rejected by government regulators on the grounds that competition breeds lower prices and better customer service.

The process for approvals is lengthy and can stretch on for years. Often antitrust regulators will ask themselves if the teaming up of two big companies will bring down prices and improve services for consumers. If the answer is no, the deal will likely get shelved or hit with a number of demands, such as orders to sell off certain assets to reduce concerns over how much market share the combined company would have.

Aetna’s proposed $34 billion merger with Humana is an example of a merger that failed to win approval after the U.S. Justice Department argued that the deal would lead to higher prices.

Companies can challenge regulators' objections to their proposed mergers in court, though few succeed in overturning a verdict. Because of the complexity and uncertainty involved, megamerger agreements regularly include break-up clauses spelling out the terms and required payments, known as termination fees, for calling off the deal.

$1 billion

The amount Aetna was forced to pay Humana when the DOJ blocked its merger and its appeal was rejected by the court.

History of Megamergers

The first megamerger took place in 1901 when Carnegie Steel Corporation combined with its main rivals to form United States Steel.

Since then, plenty more have occurred. Recent examples include the $130 billion tie-ups of Dow Chemical and Dupont, the teaming up of the world’s two largest brewers Anheuser-Busch InBev and SABMiller in 2016, and the $100 billion merger of H. J. Heinz Co. and The Kraft Foods Group.

Limitations of Megamergers

Megamergers almost always make headlines, yet not all of them live up to their hype. Bringing two companies together with different ways of conducting business can lead to cultural clashes that are sometimes irreparable.

Other risks include job layoffs, a common feature of megamergers, stirring up anger among remaining staff and potentially making them resistant to help their employers realize synergies. There is also a chance that an industry growth phase that prompted the megamerger runs out of steam, as was the case when America Online acquired Time Warner for $165 billion in 2001, just before the dot-com bubble burst.

Criticism of Megamergers

It is unclear whether megamergers benefit the general public. Over the years, companies keen to join forces with a rival have been quick to talk up the money they’ll save and how this will enable them to reduce prices. In many cases, those promises turn out to be short-lived.

Once complete, megamergers can result in the newly formed company gaining a monopoly over its market. When this occurs, the temptation to capitalize on this power is sometimes too much. Customers and companies in its supply chain may suddenly find themselves squeezed and forced to pay up whatever the newly formed entity demands, owing to a lack of feasible alternatives.