Types of Corporate Mergers

A merger, in colloquial terms, means an amalgamation of two companies into one company by operation of law. It occurs when two companies by agreement join together to form one company. Sometimes acquisition is confused with a merger. Merger and acquisition are two different terms, mostly used interchangeably. However, acquisition differs from the merger. One company purchases the other company entirely in the acquisition, whereas, in a merger, two companies merge into one new company. The boards of directors for two companies intending to get merged approve the consolidation and seek shareholders’ approval in a merger under one name. However, in contrast to the merger, in the acquisition, the acquiring company acquires the majority shares in the acquired company, which does not change its name or alter its organizational structure.

The different types of mergers will be discussed in this article. Mainly mergers are of the following types due to their manners and ways, motives, nature, and procedures; mergers are categorized into different types such as a vertical merger, horizontal merger, conglomerate merger, roll-up merger, Congeneric mergers (market-extension merger, product-extension merger).

 

Vertical Mergers

It is a merger of two companies operating along the different supply chain functions for a common purpose. Such companies’ consolidation is intended to achieve higher quality control, better flow of information along the supply chain, and merger synergies in a business’s production and distribution process. Usually, the vertical merger turns out to be a beneficial merger resulting in reduced costs, increased revenue, improved production rate, and efficacy in distributing goods and services. The vertical merger also reduces competition and provides the new company with a more significant market share. Its success is based on whether the combined company has more value than each company separately. After merging, the new company can reduce management costs by removing poorly performing managers and improving coordination and communication more effectively.

 

Horizontal Mergers

The horizontal merger of a business is the combination of two companies that operate in the same industry or business. The horizontal merger can eliminate competition between two excelling companies and increase revenue by enhancing market access and proving to be one strong company instead of two competitors. Due to both companies’ different distribution territories or areas before the merger, the merger will provide a vast market to the one joint company and provide the existing and new customers with a wide range of products. Horizontal merger is made to increase the market shares. It reduces the threat of market competition. If you are either of the merging parties, then it's your representative responsibility to legally evaluate before finalizing the merger.

 

Conglomerate Merger

In this kind of merger, the merger occurs between the companies with entirely different business activities. The companies usually run different industries and are located in different geographical zones or territories. The conglomerate merger is of two types, the pure and mixed conglomerate merger.

The pure conglomerate merger occurs between companies having utterly different businesses and have nothing in common; they carry on to operate in their own market, whereas, in a mixed conglomerate merger, companies intending for merger typically look for product extensions or market-extensions. Such mergers aim to increase market share, diversify their businesses, cross-sell their products, and to take advantage of collaborations by combining offices that could reduce costs. Besides several benefits, there are some disadvantages of the conglomerate merger, such as if the acquiring firm is inexperienced in the business of the acquired firm/company, it can put the company in loss and reduce revenue.

 

Congeneric Mergers

In this kind of merger, the two consolidating companies serve the same customers in different ways, i.e., types and nature of products and services. It is of two types; market-extensions merger and product-extensions merger.

 

Market-Extensions Mergers

It is a merger between companies that do business in the same products and services but operate in different markets. Two consolidated companies that are competitors in different markets, after the merger, complement each other and sell products together. This kind of merger provides the new company easy and broader access to the market and increases the customers.

 

Product-Extension Mergers

It is a merger between two companies that sell correlated products or services and operate in the same market. The companies’ products and services are not the same in this kind of merger, but they relate with each other. By doing such a merger, companies get access to more customers, and it helps them expand their market and gain more profit. They can use the same supply chain and utilize similar or related production and distribution channels. For example, two companies working in the electronics industry can combine their services to provide new, improved technology to the public.

 

Roll-up Merger

The roll-up or rollup merger is the merger of multiple small companies into one giant entity. An investor such as a big equity firm buys several small companies to form one large company to perform better in the market and improve its economic position. The consolidated companies provide more products and services than smaller and independent entities. By combining small companies from different territories can expand the market access. When a roll-up merger is executed, the individual companies’ owners get revenue, and for their ownership stakes, they get shares in exchange. The companies could be transferred to a holding company. Besides reducing marginal costs, companies combined in a roll-up merger can gather better name recognition, achieve improved exposure, and gain access to new markets or new or underserved demographics. Such merged entities can also benefit from better access to expertise within the industry.

Unlike mergers, the acquiring company acquires the majority shares in the acquired company; the acquiring company does not change its name or modify its organizational structure and purchase the acquired company’s assets entirely.

An acquisition can be friendly or hostile. The hostile acquisition is where the management and the directors of the targeted company are not willing to approve the acquisition of their company to the acquiring company, and the acquiring company acquires hostile takeover of the targeted company by way of directly approaching the shareholders of that company against the wishes and approval of the management and directors of the targeted company for a hostile takeover. The acquiring company directly acquires the assets of the acquired company.

In general, acquisition describes a transaction where one company absorbs another company by way of takeover. The term merger is used when the purchasing and target companies mutually combine to form an entirely new entity. Because each amalgamation is a unique case with its distinctiveness and reasons for undertaking the transaction, the use of these terms tends to overlap.