A merger happens when two companies combine to form a single entity. Public companies often merge with the declared goal of increasing shareholder value, by gaining market share or entering new business segments. Unlike an acquisition, a merger can result in a brand new entity formed from the two merging firms.

A merger typically combines two companies of roughly equivalent size. The purchase of a company by a larger entity is often called an acquisition. Mergers often involve the exchange of shares rather than cash consideration.

If the merger is to with an exchange of shares, the exchange ratio determines. Whether one of the companies is receiving a premium above its shareholder value price before the announcement of the deal. The shareholder value of that company may rise. Though that rise may be limited if the share price of its merger partner drops, eroding the initial premium.

To limit the risk of such erosion the terms of some mergers may include a collar agreement increasing the exchange ratio if a stock to falls below a certain level. Such collars limit the downside for one company’s shareholders at the expense of its merger partner and that company’s shareholders but are less common in mergers of equals or near-equals.

The market may also discount the proposed merger premium if the deal faces significant potential roadblocks. For instance in terms of regulatory approval. Conversely, the shareholder value of a company could trade above the proposed merger premium. If investors believe the deal announcement may prompt higher bids from new suitors. M&A strategies continue to create gains in excess total returns to shareholders, at lower levels of risk.

Companies that use a programmatic approach create deal flows linked to their conviction in their corporate strategy. Understanding of their competitive advantage, and confidence in their capacity to execute. They manage their growth strategies proactively. And their approach to M&A does not change, regardless of the success or failure of any single deal.

For companies using a large-deal approach to M&A—that is. Pursuing deals in which the target company’s market cap is greater than or equal to 30 percent of the acquirer’s market cap—our research confirms that such pursuits are, as mentioned earlier. The equivalent of a coin toss. But companies can increase the odds of success with this approach by complementing it with a programmatic strategy.