Types of Merger in Business with Examples

What is a merger in Business?

A merger in business is a financial strategy whereby two companies come together to form a single company. Mergers and acquisitions take place in order to expand the reach of the company, reduce the cost of operation, gain larger market share, unite common products, grow revenues, increase profits and expand into new segments. All these activities take place to increase the value of shareholders. Usually, during a merger, there is a no-shop clause by companies to prevent purchases or mergers by additional companies.

The merger has to be voluntary, that is, the two companies have to agree in order to arrive at a fusion into one. When two companies merge, they become a single legal entity. The companies that agree to merge tend to have roughly equal sizes, customers, and scale of operations. It is for this reason that the term, “merger of equals” is sometimes used. Unlike mergers, acquisitions are generally not voluntary. This has to do with one company acquiring or purchasing another. After a merger has taken place, the new company distributes its shares to the existing shareholder of both original companies.

Types of mergers in Business

  1. Conglomerate
  2. Congeneric
  3. Market extension
  4. Vertical
  5. Horizontal

These types of mergers are dependent upon the goals of the companies that are involved.

Conglomerate merger

This is a type of merger between two or more companies that engage in business activities that are not related. The operation of these firms may be in different geographical regions or industries. In essence, a pure conglomerate merger has to do with the coming together of firms that do not have anything in common. On the other hand, a mixed conglomerate merger takes place between companies that are striving towards gaining product or market extensions although their business activities are unrelated. Today, the conglomerate is less popular but in the 1960s and 1970s, it was quite popular.

The advantages of conglomerate are that there are lower investment risks, diversification of business, financial benefits, access to new personnel and networking, and entry to intellectual property. On the other hand, its disadvantages are clashes and cultural differences as a result of different backgrounds and industries and conflicts in governance. Also, it is possible to lose taxation benefits, there is also a potential overall decrease in market efficiency, and some people believe that this merger reduces innovation as a result of the “buy” mentality.

Conglomerate merger examples

Walt Disney Company and American Broadcasting Company in 1995, Paypal and eBay merger in 2002, Honeywell and Elster in 2016, COMCAST and UNIVERSAL in 2011, and Amazon and Whole Foods merger in 2017.

Congeneric merger

This is also known as a product extension merger where two or more companies merging together operate in the same market or sector with overlapping factors such as marketing, the process of production, technology, and research and development (R&D). In essence, companies can achieve a product extension merger when a new line of products from one company is being added to an existing line of products of another company. When two companies merge under a product extension, they can gain access to a larger group of customers and obtain a larger market share. Under the congeneric, the companies merging are part of the same industry, that is, both companies have something in common.

The advantage of the product extension is that operational efficiency increases thereby reducing costs. Also, there is better customer satisfaction. When customers are satisfied, it is of great advantage to an organization. This in turn helps in expanding the customer base of the organization. When companies come together to merge, they increase their market share and profit. This also helps them to gain competitive advantage. There exists a better utilization of common resources as their production processes are interlinked as well as their distribution channels and supply chains.

Congeneric merger examples

Broadcom and Mobilink Telecom Inc. in 2002, Citicorp and Travelers Group in 1998, and Exxon and Mobil in 1998.

Market extension

This is a type that takes place between two or more companies that sell the same products but compete in different markets. The aim of the product extension merger is to gain access to a larger market as well as a larger client base. Another aim is to gain more profit. Merging with regard to this becomes a good idea when one feels as if he is no longer reaching the customers he intends to reach. Also, when the reach tends to be severely limited and there is a need to expand the product to other markets.

The advantage is that the merged company will get new team members and it will become more possible to gather new ideas that will help in improving the process of expansion. Also, there will be a larger customer base where one will be able to sell his products to a larger audience, this will amount to higher profits. The market extension merger attracts new clients as the companies merging will have access to the old clients of each merging party. The reputation of their company will be on the increase which will bring about more clients.

The disadvantage of market extension is that there will be greater responsibilities but it depends on who is operating the business. this implies that the greater responsibilities can as well be to one’s advantage. Also, there are larger capital requirements as there will be bigger production meant to reach out to a wider audience. It, therefore, requires more investments and a greater workforce. This may bring about a shortage of cash. Another thing is that the merged companies may be incurring potential debt. This is because as two companies are merging, they may be merging with their debts as well.

This calls for the need for a good plan to relieve that debt. If the debt is too great or becomes too difficult to handle, the company merging with the indebted c/ompany may be dragging down with the merger.

Market extension example

Eagle Bancshares and Centura merged which benefited them in the aspect of the growing operations in the North American market.

Vertical merger

This is a situation whereby two companies that may not be competing but exist in the same supply chain come together to form a single entity. The aim of this is to increase synergies being created by merging firms that there will be more efficiency operating as one. We can say that a vertical merger occurs between two or more companies that are involved in different stages in the same supply chain. Usually, vertical mergers take place between a manufacturer and a supply in an attempt of increasing efficiency and gain business. It is a way of capitalizing on efficiency when it comes to business profits and expansion.

One advantage of the vertical merger is cost reduction and increase efficiency in production. However, in some cases, costs can increase. This helps in reducing financial constraints and poor management. Also, a better administration is being created. Through this, companies are able to gain control over their supply chain and there are strategic benefits that accompany this such as improved competitiveness and market power.

One disadvantage of the vertical merger is that there can be a loss of key personnel members as not everyone will be able or willing to maintain their positions once the companies merge. Also, there may be a failure if the merged companies are unable to integrate their distinct corporate cultures in one unit.

Vertical merger examples

eBay and PayPal in 2002, Time Warner Inc and Turner Cooperation in 1996, and Dell and EMC in 2015.

Horizontal merger

This is a merger that takes place between companies that operate in the same industry. Typically, it is part of a consolidation that takes place between two or more competitors that offer the same products or services. This is common in industries that have fewer firms. The aim of this is to create a larger business with a greater market share as well as economies of scale since there tends to be higher competition among fewer firms.

Horizontal merger example

Daimler Benz and Chrysler in 1998 is considered a horizontal merger.

Advantages of a business merger

  1. Economies of scale
  2. Increased access to capital
  3. Economies of scope
  4. Synergies
  5. Increased market share
  6. Higher Levels of competition
  7. Access to talent
  8. Diversification of risk
  9. Faster strategy implementation
  10. Tax benefits
  11. Avoids replication
  12. Expands business into new geographic areas
  13. Lower labor costs
  14. Prevents closure of an unprofitable business
  15. More financial resources
  16. Enhanced distribution capacities

Economies of scale

When two companies merge, this can bring about economies of scale. This is because the larger the company is, the less the cost of production. Also, there is a higher output from the new company. In other words, there are benefits that come from becoming a larger company.

In other words, the cost of operation reduces as they can buy raw materials in bulk, here, the cost reduces. It is certain that with bulk-buying of raw materials, there is a greater discount. Therefore, the company can spread out the investment on assets over a larger output thereby leading to technical economies.

Increased access to capital

As a result of low cost, there is a greater output as well as a better bargaining power with distributors. Moreso, economies of scale allow the merged company to enjoy certain advantages that smaller companies would not. This gives rise to increased access to capital.

Economies of scope

This refers to a situation whereby there is a decrease in the total cost of production when a variety of products is being produced instead of producing them separately. This is usually possible when two or more companies producing different products merge as this may be cost-efficient. When there are economies of scope, companies will be able to tap into the demand of a client base that is much larger.

Synergies

We can typically describe synergies as “one plus one equal to three” which refers to the value coming from two companies that work together as one to achieve something that is far more powerful.

Increased market share

One of the most common motives behind companies merging is to increase market share. Looking at it historically, retail banks have taken a look at geographical footprint as a key factor to the achievement of market share. As a result of this, there has always been a high level of consolidation of industries in retail banking. Most countries possess a group of “Big Four” retail banks.

Higher Levels of competition

In theory, a company becomes more competitive the larger it becomes. Moreso, this is one of the benefits that a company derives from economies of scale as being bigger allows one to be more competitive. An example is the presence of dozens of upstart companies entering the plant-based meat market that are offering a range of vegetable-based meats.

However, when Procter & Gamble Company or Nestle start focusing on this market, many of these upstarts will fall away as they will be unable to compete with these colossuses.

Access to talent

The larger a company is, the more it will have access to talent which is true for every industry including technology.

Diversification of risk

Diversification of risk goes hand in hand with economies of scope. When a company has more streams of revenue, it will be able to spread risks across those streams instead of having it focus on just one. Giving an example of Facebook, some analysts are suggesting that younger eyeballs are deviating from the social media giant and heading towards other forms of social media such as Instagram and WhatsApp.

It is certain that an alternative stream of revenue may hold when one stream falls. It may even pick up diversifying risks facing the merging companies in the process.

Faster strategy implementation

Business mergers can be the best way of making long-term strategies to become a mid-term strategy. If a company probably desires to enter the Canadian market, it can build from the ground up and hope to arrive at the desirable scale in the next five to ten years. It may be a business, its client base, distribution, and the value of the brand and benefit from them all at the close of the merger or acquisition. Also, this goes for areas like new product development and Research and Development where an organic strategy can scarcely match the speed that a merger provides.

Tax benefits

If the target company is in a strategic position or a country that has a favorable tax regime, a merger can sometimes bring about tax benefits. An example is the US pharmaceutical companies taking a look at smaller Irish companies and moving to Ireland to avail of its lower tax base is a case that is on point.

Avoids replication

If there are companies that are producing similar products, merging will help them to avoid duplication as well as eliminate competition. This further brings about a reduction in price for customers.

Expands business into new geographic areas

If a company is seeking to expand its business in a specific geographical location, it may consider merging with another similar company in order to get the business started.

Prevents closure of an unprofitable business

Some companies may be so unprofitable that they are on the verge of closing down their businesses. Mergers can save them from going bankrupt as well as save many jobs.

Lower labor costs

A merger or acquisition can bring about multiple members of staff that do the same job at each individual company. By them coming together and eliminating alien staff, a company will be able to reduce its overall cost of labor as well as maintain a stronger and more effective labor force. The companies that involve in mergers or acquisitions may review the performance of individuals that play similar roles. They can as well choose the most appropriate talent for each position in the new company.

More financial resources

Every company that involves in mergers or acquisitions can pool its financial resources thereby increasing its overall financial capacity. Also, new investment opportunities may emerge and the company will be able to reach out to a wider audience with a larger marketing budget or inventory capabilities that are more significant.

Enhanced distribution capacities

When two or more companies merge, they expand geographically thereby enhancing their ability to distribute goods or services on a wider scale and to a larger audience.

Disadvantages of a merger

  1. A rise in the prices of products or services
  2. Creates gaps in communication
  3. Creates unemployment
  4. Prevents economies of scale
  5. Increased legal costs
  6. Potentionally lost opportunities

A rise in the prices of products or services

A merger can result in a decrease in competition and a larger market share. Certainly, a larger market share is an advantage to the company, but the company can gain a monopoly. In turn, this will bring about an increase in the prices of products and services which is of disadvantage to customers.

Creates gaps in communication

Different cultures exist among the companies that agree to merge. These cultural differences may bring about a gap in communication thereby affecting the performance of the employees.

Creates unemployment

If the merger becomes aggressive, the company may be directed towards eliminating the assets of the other company that is underperforming. In turn, some employees may lose their jobs.

Prevents economies of scale

On one hand, a merger leads to economies of scale but on the other hand, it can prevent economies of scale in cases whereby there is little in common with the merging companies. Also, if a company is bigger, employees may be demotivated to achieve the same degree of control. With this, the new company may be unable to achieve economies of scale.

Increased legal costs

It is a legal business transaction when two companies merge, which requires that several key professionals be involved. It is necessary for the people involved to bring in lawyers that are specialized in this type of deal. Also, there will be a need for financial professionals who can provide assistance with regard to the assets and other financial details. This implies that the legal costs involved when two or more companies merge are high.

Potentially lost opportunities

For companies to merge, a lot of time and energy goes into it and this sometimes requires that the businesses involved forego other potential opportunities. Also, some employees may lose their jobs in the process. In other words, this can bring about unemployment.

Differences between mergers and acquisitions

In a merger, the companies that are involved may choose a new name that will be a reflection of the vision of the newly merged company. Or they may choose to make use of the existing company names for the maintenance of brand awareness and loyalty. On the other hand, a company is acquiring another company in an acquisition. This implies that the acquiring company maintains its business name, legal structure, and operations.

From a legal point of view, the company that another company acquires ceases to exist as its own legal entity and under its previous name. The acquiring company has absorbed it. This also means that if the acquired company has sold or traded stock, it is the acquiring company that will own and manage the stock.

Most times, people use mergers and acquisitions interchangeably. It is clear that certain situations are mergers while others are acquisitions and this is dependent upon the terms of the business deal. If a company does not wish for another company to take over it, we will view this situation as an acquisition, however, it can be regarded as a hostile takeover. Oftentimes, the difference is present in the way the merger or acquisition is presented to the employees, board of directors, and shareholders. However, many merger and acquisition situations are mutually beneficial and this may give companies the room to grow their presence and expand their reach.

FAQs on merger in business

What are the 4 types of mergers in business?

The types of mergers are conglomerate, congeneric, market extension, vertical merger, and horizontal merger.

What is the difference between merger and acquisition?

While a merger has to do with two companies coming together to form a single entity, the acquisition has to do with one company purchasing another. Also, in a merger, the companies that are involved may choose a new name that will be a reflection of the vision of the newly merged company. On the other hand, a company is acquiring another company in an acquisition. This implies that the acquiring company maintains its business name, legal structure, and operations.

How does a merger work?

A merger has to do with two or more companies coming together to form a single and a larger company. Usually, the companies that agree to merge are equal in size, the scale of operations, and customers. For companies to merge, it is important for them to have common goals and objectives so that they can move together. When a merger takes place, the new company will then distribute its shares to the existing shareholders of both original companies.

Leave a Comment