A merger happens when a company finds a benefit in combining business operations with another company in a way that will contribute to increased shareholder value. ... In theory, a merger of equals is where two companies convert their respective stocks to those of the new, combined company.

How does a merger work legally?

Mergers combine two separate businesses into a single new legal entity. True mergers are uncommon because it's rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs. Unlike mergers, acquisitions do not result in the formation of a new company.

Who pays in a merger?

M&As can be paid for by cash, equity, or a combination of the two, with equity being the most common. When a company pays for an M&A with cash, it strongly believes the value of the shares will go up after synergies are realized. For this reason, a target company prefers to be paid in stock.