A merger is an agreement in which two companies join together to form one firm. Of course, this is a simplified definition as there are a number of ways for companies to combine into a single legal entity. This article is a brief discussion about the types of mergers local and national companies can undergo. Actually engaging in a successful transaction requires the advice and counsel and of a seasoned mergers and acquisitions attorney.
How many categories of mergers are there?
Generally, there are 5 basic types of mergers:
- Horizontal mergers between two companies competing in the same market
- Vertical mergers between companies along the same supply chain (e.g., a manufacturer merges with a company that supplies the raw materials for its products)
- Market-extension mergers between companies that offer similar products and services but in different markets
- Product-extension mergers between companies in the same markets that deal in different but related goods or services
- Conglomerate merger between companies in unrelated business activities (e.g., a tech company buys a newspaper)
Ultimately, the type of merger depends on factors such as the purpose of the business transaction and the relationship between the merging companies. Let’s take a closer look at each type of merger.
A horizontal merger consolidates businesses that operate in the same space (often as competitors) dealing in the same product or service. The objectives of a horizontal merger are to:
- Increase market share
- Maximize economies of scale
- Exploit merger synergies
These transactions are common in industries with fewer players where the potential gains for market share are much greater. A contemporary example of a horizontal merger is the integration of Facebook, Whatsapp, and Instagram into one large social media outfit in which users can interact through one network.
A vertical merger occurs between two or more companies producing different goods or services at different levels within an industry’s supply chain. The companies may or may not compete directly with each other. The goal is to increase efficiency and synergy by operating as one firm.
An example of a vertical merger is an automaker merging with a parts supplier to obtain better pricing on parts and exercise more control over the manufacturing, simultaneously guaranteeing the parts division a steady stream of business.
This type of merger involves two companies dealing in the same products but in separate markets. The objectives are to (1) gain access to a greater market share, and (2) develop a larger customer base. Market-extension mergers are typical in the financial services sector, such as J.P. Morgan’s acquisition of Bear Stearns during the 2008 financial crisis, which was facilitated by the Federal Reserve.
A product extension merger occurs between two businesses that deal in related products or services and operate in the same market. The transaction allows the merged entity to:
- Combine their products
- Gain access to a larger set of customers
- Earn higher profits.
A classic example of a product extension merger is Pepsico’s acquisition of the Pizza Hut, Taco Bell, and KFC Chains.
A conglomerate is formed when firms involved in totally unrelated business activities merge. There are two types of conglomerate mergers: pure and mixed. A pure conglomerate merger involves firms with no common lines of business, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. For example, Amazon.com was once an online bookstore. Its acquisition of Whole Foods, PIll Pack, and The Washington Post, assisted in the transformation of the former online bookstore into the company we know today and provides a classic example of a quintessential conglomerate.
Ultimately, the objective of a merger is to create synergies whereby the value and performance of the combined companies will be greater than the sum of the individual parts. In the final analysis, it takes an experienced business attorney working in conjunction with a team of professionals to expedite successful mergers and acquisitions.