Megamerger

Megamerger is a term used to describe the joining of two large corporations, typically involving a transaction worth billions of dollars in value. A megamerger creates one corporation that may maintain control over a large percentage of market share within its industry.

Megamergers occur through the acquisition, merger, consolidation or combination of two existing corporations. Megamergers differ from traditional mergers due to their scale.

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

Megamergers in the recent past have included Pfizer's $68 billion deal for Wyeth (2009), Kraft's nearly $20 billion deal for Cadbury (2010) and the United–Continental merger (2010), which created the world's largest airline.

In addition to having to seek approval from both companies' board of directors and shareholders, companies attempting megamergers also get heavy scrutiny from government regulators. 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 axes 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.

The process for approvals is lengthy. In the U.S., it can stretch on for years. In some cases, where the combined company would have market share high enough to be viewed as harmful to competitors or consumers, the applicants may be required to divest operations. For instance, Time Warner’s merger agreement with Comcast included proposals to sell assets to reduce concerns over how much market share the combined company would have. In other cases, regulators deny approval of the merger. This was the case with Aetna’s proposed $34 billion merger with Humana and AT&T’s proposed $85 billion purchase of Time Warner.

In the latter case, the DOJ sued to prevent the deal from going through, citing the merged companies "ability to impede and slow innovation by hindering emerging competitors … and harm consumers … ” Companies can challenge regulators' objectives to their proposed mergers in court. Aetna took this route after the DOJ sued to block its merger, but was unsuccessful when the court ruled against the deal.

Because of the complexity and uncertainty involved, megamerger deals include break-up clauses spelling out the terms and required payments, known as termination fees, for calling off the deal. Aetna was forced to pay Humana a $1 billion termination fee when their merger deal fell through.