Types of Mergers: Meaning, Classification, and Examples
Introduction
A merger comes about when two or more companies make a decision to combine their operations and form one single company. In most cases, the companies that merged will cease to exist and the new (or surviving) company will be the one operating.
Very often one can hear about mergers in the business world. There are plenty of them, some are insignificant, and some are so big that the whole world learns about them. Companies merge for a multitude of reasons: to increase their pace of growth, to reduce costs, to access new markets, to acquire new technology, or to become more powerful against competitors.
1. Horizontal Merger
A horizontal merger occurs when two companies that are competitors and offer similar products or services in the same market merge. Both companies operate at the same level in the business chain. They do the same kind of work and compete for the same customers.
Why companies do it:
To become bigger and have more control over the market
To eliminate a competitor
To cut their costs by merging their offices, factories, and staffs
To get better prices from suppliers because they buy more
To let the same customers buy more products
As a result of this merger, the newly formed company often has a significantly larger share of the market. Regulators monitor these mergers very closely as excessive control by one company can lead to higher prices for customers or less choice.
2. Vertical Merger
A vertical merger takes place when a firm purchases or merges with a company that either supplies it or buys from it. To clarify: one company is upstream (provides raw materials or parts), the other is downstream (sells the finished product).
There are two types:
Backward vertical merger: a company merges with its supplier. Objective: Secure the supply, lower the costs, and control the quality.
Forward vertical merger: a company merges with its distributor or retailer. Objective: Control how the product reaches the customer, get higher profit margins, and ensure that the product is always available.
Why Companies do it: Reduce costs at every step of the way Make sure that the supply is uninterrupted Keep trade secrets within the company Have more control over the entire process from start to finish Vertical mergers are usually less concerning for regulators than horizontal ones, as they do not result in a lower number of competitors in the same market.
3. Conglomerate Merger
This type is horizontally understood as a duo of two companies that had no prior business connection and hence, no common products, customers, or were not operating in the same industry
There are two sub-types of conglomerate mergers:
Pure conglomerate: there is no product or market overlap at all.
Mixed conglomerate: the companies plan to sell each other's products to their own customers or use each other's distribution channels.
Why companies do it:
Spread risk – if one sector is going badly, the other may still be able to do well
Invest the surplus cash from one business in another to grow rapidly
Increase very quickly without starting from scratch in every area
In some cases, get tax benefits
Executives sometimes enjoy managing a bigger company
Many years back, conglomerate mergers were very trendy. Today they are not as frequent because most companies end up deciding to split again due to management difficulties of unrelated businesses.
4. Market Extension Merger
This fusion occurs when two businesses offer the same things or services but in entirely different geographical areas.
Both businesses are engaged in the same type of business, however, they are not competitors as they are located in different cities, states, or countries.
Reasons for doing it:
An option to achieve quick market penetration without the need of starting from scratch
Utilizing the other firm’s local expertise, shops, warehouses, and clientele
Getting a national or international player status quicker
Advertising and brand costs sharing over a larger area
Consequently, the company will be able to sell the same product to many more customers in many more places.
This merger is the combination of two companies that sell different but related products that can be distributed through the same channels or sold to the same customers. The products are not identical, but they complement each other nicely.
Reasons for doing it:
- -To provide the current customers with a larger range of products
- -To use the same sales team, stores, or website to sell more products
- -To increase sales without making a significant marketing investment
- -To make customers stay longer with the company because they can buy everything from one place
The new company after the merger has a larger product line and can make more money from each customer.
6. Concentric Merger (also called Concentric Diversification)
This resembles a product extension situation, however, the link here is through the customer type or technology instead of the distribution channel. The two firms may have different products but their customers are of the same type, or they employ similar technology or production methods.
Reasons for companies to do it:
Exchange of technical knowledge
Sharing of marketing skills for the same customer group
Giving more services to the same clients
Lowering the risk while being close to the core business.
7. Reverse Merger (or Reverse Takeover)
This classification is not a business type based on activities but rather on the legal method.
Generally, in a merger, a bigger company acquires a smaller one, and the bigger company continues to operate.
Whereas in a reverse merger, a smaller private company merges with a larger publicly traded company that is already listed on the stock exchange (usually an empty "shell" company with no real business).
It is the private company that after the merger becomes a public company without going through the long and expensive traditional public listing process.
Why they do it:
First, to be listed on the stock exchange very fast and at a low cost.
Second, to be able to raise funds from stock market investors.
The owners of the private company, therefore, have the majority control of the public company.
8. Acqui-Hire Merger
Such a special type is where, as a result of a merger, it is the employees with their skills that are acquired rather than products or customers.
Basically, a big company purchases a small company (most of the time a startup) primarily to obtain the talented team of the small company.
It is after the transaction that the product of the small company is, in most cases, being discontinued or unheeded.
How companies benefit from it:
Firstly, they are able to get highly skilled workers in areas such as software, engineering, or data science very quickly.
Secondly, they can save the time and cost of the regular recruiting process.
finally, they can prevent a competitor from hiring the same team.
9. Hostile Merger
In general, most mergers are friendly – both companies are on the same page.
A hostile merger is a scenario where a company A desires to acquire company B, but the management of company B rejects the idea. Subsequently, company A approaches the shareholders directly and proposes to purchase their shares at a high price.
So, if a sufficient number of shareholders agree to sell, the acquiring company will be in control even though the managers are opposed to it.
10. Statutory Merger
By a statutory merger, a company ceases to exist entirely and is, by law, merged with the other company. The company that survives the merger inherits all the assets and all the liabilities of the company that ceases to exist.
It is the most straightforward merger legally.
11. Subsidiary Merger
So the company that is being acquired will live on as a subsidiary owned 100% by the buyer. The company retains its name and continues its existence as a separate legal entity but the parent company has the control over the target.
The reasons why companies choose to do it are as follows:
To be able to use the brand name which is already well known
Selling the business will be much easier if that is what you decide to do later
12. Triangular Merger
This is one more legal structure. The acquirer establishes a new empty subsidiary. The subsidiary then merges with the target company. As a result, the target company becomes a part of the new subsidiary, and the subsidiary is owned by the parent company. A couple of ones: Forward triangular: the target continues to operate as a subsidiary Reverse triangular: the target becomes the surviving company but a subsidiary of the buyer The main reasons for a triangular merger are tax-related purposes and avoiding the need for a shareholder vote directly.
Why Companies Choose Different Types?
The nature of a merger is contingent upon the circumstances:
To be able to use the brand name which is already well known
A horizontally merged company will be the outcome of two competitors if they aim to become significantly bigger.
If a company is concerned about the prices of raw materials, it will opt for a vertical backward merger.
A conglomerate merger will be the choice of a company with extra cash, looking for safety.
A company buying a market extension to sell nationwide quickly is what will result from a merger.
By product extension, a company will be able to offer a full product line.
A private small company doing a reverse merger is the quickest way to be listed on the stock exchange.
What Happens After a Merger:
A merger of any kind is followed by a list of things that life usually entails:
Merging local offices and factories
Dismissing some workers in order to reduce the duplicates of the jobs resulting from the merger
Merging computer systems
Deciding one or both brand names
Paying off the debts or getting a new loan
Management changes