Which of the following best describes a merger?

A merger refers to the situation where two companies come together to form a single new entity, effectively combining their operations and ownership. This creates a collective organization where the strengths and resources of both firms can be utilized to enhance competitiveness and market presence.

In this context, the creation of a new entity highlights the collaborative nature of a merger, indicating that the companies are integrating rather than simply one acquiring the other. The resultant organization usually shares assets, liabilities, and equity, fostering a unified direction and strategy moving forward.

Other choices describe different business activities. The purchase of one company by another pertains specifically to acquisitions, where one firm takes over another completely rather than forming a new entity. Diversification into a new product line involves expanding a business's offerings but does not imply a combination of two distinct firms. Franchising involves licensing a brand to operate under its name, which does not create a new company but rather allows for distribution of a brand’s concept across new locations.