Types of Mergers

What is a Merger?

A merger is a voluntary merger of two companies with almost identical conditions into a new legal entity. The companies that agreed to merge were roughly equal in size, customers, and operations. For this reason, the term "merge equals signs" is sometimes used.

Acquisitions, unlike mergers, are usually involuntary and involve one company actively purchasing another.

Mergers are usually conducted to gain market share, reduce operating costs, expand into new territories, consolidate everyday products, and increase revenue and profits, which benefit the business's shareholders.

After the merger, the new company's shares are distributed to the existing shareholders of the two original companies.

Due to many mergers, a mutual fund named The Merger Fund by Virtus Investment Partners was developed to allow investors to profit from the merger deals. The fund keeps track of the gap between the bid and trading prices.

It makes investments in companies that have publicly announced mergers or acquisitions. Since its debut in 1989, his fund has averaged a 5.8% yearly return (as of March 31, 2022).

Types Of Mergers

A merger is an agreement where two companies are close to forming a single company. In other words, a merger combines two companies into a single legal entity.

The term used to describe the merger is determined by the union's economic function, the business transaction's purpose, and the relationship between the merging companies.

There are five basic types or sorts of mergers: 

1. Horizontal Merger: Occurs when two companies compete directly in product lines and marketplaces.
2. Vertical Merger: Occurs when two companies in the same supply chain unite (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
3. Market-Extension Merger: Develops when two companies in different markets sell comparable products or services.
4. Product-Extension Merger: Occurs when two companies in the same market sell different but related products or services.
5. Conglomerate Merger: A merging of corporations with unrelated businesses (e.g., a clothing company buys a software company)

Let's discuss these mergers in detail in the following sections.

Horizontal Merger 

A horizontal merger is a merger or business combination that occurs between companies operating in the same industry.

Competition tends to be higher among companies operating in the same space, which means that synergies and the potential for market share increase are much more significant for consolidated companies.

This merger frequently occurs as larger companies try to create more efficient economies of scale. Horizontal merger aims to provide

• Synergies
• Cost optimization
• Reduction of competition
• Leveraging economies of scale
• Improve competitive positioning

In contrast, vertical consolidation occurs when companies from different parts of the supply chain come together to make the production process more efficient or cost-effective. A horizontal merger can help a company gain a competitive advantage.

For example, if one company sells similar products to the other, the combined sales from the horizontal consolidation will give the new company a larger market share.

If one company manufactures products that complement the other, the newly incorporated company can offer its customers a more comprehensive range of products.

A merger with a company that offers different products to a separate market area will help the new company diversify its offerings and enter new markets.

Horizontal Merger Advantages 

The company can do horizontal integration in the form of mergers and acquisitions. It simply means that competing companies in the same industry combine to achieve economies of scale and higher market share.

Here are the advantages of horizontal integration:

1. Competitive Advantages: Horizontal integration improves market share and cost synergies. This leads to the enhancement of the company's competitive advantage over its competitors. The main competitive advantage will be the unit's combined market share. 
2. Market Expansion: The merger of two companies in similar industries results in a more extensive customer base for the combined entity. This is one of the main advantages of horizontal integration. 
3. Cost Synergies: When two competitors in the same industry merge, the combined unit reduces costs and increases production. This is because an individual item's unit cost decreases as the scale of production increases. 
   • This concept of economies of scale relates to operational efficiency and synergy resulting from an increase in production level.
4. Increased Market Share: A horizontal integration strategy will help increase market share through synergies realized from the combined units. As a result, the market shares of the two companies will be added together, and the company can quickly improve it further.
5. Geographical Advantages: Instead of starting a business abroad, it would be beneficial to acquire or link up with a local company. This will help the parent company get established quickly and generate profits in various ways. 

Horizontal Merger Disadvantages 

Here are some disadvantages of horizontal mergers that a company should consider before making a decision:

1. Anti-Trust Law: Regulators worry if companies try to achieve a monopoly. Antitrust Laws preventing giant corporations from mergers and acquisitions would reduce market competition and potentially create trust. 
2. Economies Of Scale: Inequality of scale is when a firm experiences an increase in average unit cost as production increases. As a result, the manufacturing process becomes less efficient after a specific point in the production output. 
   • There is a risk of losing economies of scale after horizontal integration due to business expansion.
3. Unmaterialized Synergies: Horizontal consolidation requires a significant degree of synergies between the two firms. In some situations, these synergies can't be realized. This is one of the main risks and disadvantages of horizontal integration. 
4. Employee Situations: Unforeseen employee issues can arise after horizontal integration. For example, management decisions about firing current employees may occur. In addition, some pressure from union associations may occur unexpectedly. 
5. Lack Of Financial Capacity: Horizontal integration requires substantial financial capacity. The main financing requirement is an acquisition or merger with a business in a similar industry. Furthermore, there will be costs involved after integration to optimize business operations. 

Horizontal Merger Example 

Let's discuss the most famous examples of vertical mergers.

1. HP and Compaq: This horizontal consolidation allows HP to compete better against solid competition in its industry. Specifically, by pooling resources and information, startups believe they can better innovate and meet their industry's ever-changing needs.
2. Exon and Mobil: The Exxon/Mobil merger created the largest oil company in the world. It is also profitable due to reduced costs and increased oil prices due to less competition.
3. Disney and Pixar: When Disney bought Pixar, Disney reaped many benefits, including eliminating competition and acquiring Pixar's technology and talent.
4. Microsoft and LinkedIn: Expanded marketplace and technology for both parties are critical elements of this agreement. The LinkedIn CEO also noted that he was attracted to Microsoft's innovative and agile ways.
5. FedEx and Mupa Anyone interested in vertical integration should look into FedEx's history and acquisitions. FedEx's business model, more than any other, relies on tightly linked supply chains, so the company is always looking for effective vertical integration.

In 2011, it purchased the Mexican operations of Multipack (Mupa), giving it control of the company's pick-up and delivery network, warehousing and logistics services, 48 distribution centers, 13 warehouses, and over 500 retail outlets, all of which were rebranded as FedEx.

Vertical Merger

Vertical integration is the merger of two or more companies in the same industry that generate different products or services throughout the value chain. It gives businesses a strategic tool for growing their business and gaining more control over supply chain support stages.

Many actors participate in the supply chain, mainly suppliers who supply raw materials, manufacturers who produce products, and distributors who then supply retailers, who ultimately sell products and services to the end customer.

So why do companies get involved in such mergers?

The goal of a vertical merger has many reasons why companies aim for it. Some of them are:

• Streamlining operations
• Enhancing efficiency
• Secure supplies
• Cost reduction
• Control over the supply chain

Vertical mergers allow companies to use synergies to make their operations more efficient, reduce costs, and grow their businesses. It also allows companies to develop their processes in different supply chain stages.

Vertical Merger Advantages

This type of merger adds more excellent value to the merged business than the value of the separate companies under individual ownership. A vertical merger's goal is to increase a single business entity's synergy and operational efficiency.

Some possible reasons for such a merger include the following:

1. Improved Management: Vertical mergers can significantly improve an organization's management structure. Companies can restructure and take the most influential leaders from each company and then group them to work together.
2. Better Profitability: Higher profitability is another advantage of vertical mergers. When companies consolidate, they increase their market power, significantly increasing profits. 
3. Getting Rid Of Redundant Practices: Vertical mergers also allow companies to reduce redundant production and distribution steps, helping to reduce costs. Production is moved in-house, giving these organizations greater control over charges. 
4. Better Control Of Resources: When merging, companies have the opportunity to gain more control. For example, a retail company could combine with a manufacturing company, giving them more control over their production and distribution quality. 

Vertical Merger Disadvantages 

However, vertical merging is not without its difficulties. Here is a list of common challenges practitioners face during vertical mergers:

1. Additional Costs‍

In some cases, costs can add up as the two consolidated companies. For example, Although the strategy is to reduce production costs, many bureaucratic costs may be involved. Sometimes these additional costs can outweigh the benefits of overall consolidation.

This can strain the incorporated companies, possibly preventing them from growing as successful entities. To meet this challenge, create a solid integrated plan that addresses these costs and eliminates redundant staff or processes.

2. Loss of key personnel‍ 

When two businesses merge, key personnel may be lost. Unfortunately, not everyone is able or willing to retain their position when organizations are consolidated.

While most mergers attempt to retain key staff members, what matters ultimately is who will do the best job in the merged company, and unfortunately, Valuable pellets may be lost in the process.

Increased communication and transparency during mergers can address this challenge by keeping key personnel on the same page.

3. Different corporate cultures‍ 

A merger can fail when two companies cannot successfully integrate their distinct corporate cultures into a harmonious unit.

There are many reasons why two or more companies decide to merge, and when they do, they bring together many unique people and processes that must now work together as one.

For a merger to be successful, operating and management styles must be carefully considered and integrated.

Vertical Merger Example 

As mentioned earlier, vertical integration occurs when two or more companies at different stages of the supply chain produce everyday products or services.

For example, company A manufactures handbags, and company B supplies the leather used to make them.

Now let's discuss the famous examples of vertical integration.

1. IKEA acquires forests in Romania and the Baltic, 2015 

Few companies depend on wood as a raw material, such as the Swedish furniture manufacturer and distributor IKEA.

In 2015, they announced that they were acquiring significant forest land in Romania and the Baltic countries to secure the source of raw materials. There can be several motives behind the transaction.

First, the Forest Stewardship Council (FSC) banned logging in Russia last year. Second, Russia's first political instability with Ukraine began in 2014, perhaps encouraging IKEA to seek more politically stable environments.

Third, and perhaps most importantly, the acquisition helped IKEA ensure that it was sustainably harvesting the forest.

2. Iceland acquires Loxton Foods, 2012 

Iceland is a British food retailer specializing in a wide range of frozen foods. In 2012, it acquired Loxton Foods, one of its leading suppliers.

The acquisition of Loxton Foods allowed it to secure the future of a significant supplier (Loxton was subsequently threatened with bankruptcy) of fresh and frozen products, allowing it to avoid any short-term supply problems.

Market Extension Merger

A market expansion merger is defined as the merger of two companies within the same markets with similar products. The central aspect is that the products have to cater to different audiences.

Firms that offer similar products and services merge to expand their market reach. These firms combine their capabilities and offer products and services to different markets.

To penetrate new markets, a combination of resources, expertise, market knowledge, profitability, capital, and customer base is needed.

A market expansion merger has one goal: growth. This strategy is desirable when you feel your product has minimal reach and want to expand to other markets.

Suppose one company has its reach in Switzerland, while another targets France. Then, the merger of these two companies could increase their reach in the global market, allowing them to sell to the same group of people from different geographical points.

If two credit unions from different regions merge, it will be considered a market expansion merger. At this point, the newly merged company may have doubled its customers, making it a sizable competitor. Due to its geographical presence and growth, it can attract new customers.

Market expansion mergers are often your choice when you want to expand statewide or globally. Several companies may merge in this respect, but once the merger is successful, the company's recognition will become global.

Market Extension Merger Advantages

Due to its scope, Market Expansion Mergers are very popular among those looking to expand their business. With that in mind, here are the benefits you can enjoy:

1. Market Expansion: Expanding into another market can recruit new members to your team. After all, when you buy a company to merge, even if it's to break into a new market, you're getting new employees that you know are qualified for the job. 
2. Customer Base Expansion: This may be an apparent reason, but the most significant benefit of a market expansion merger is a more extensive customer base. 
   Once merged, you can sell your products to a broader audience. This consolidation will result in higher returns, which is what you are aiming for.
3. Access To Old Customer Base: When you conduct a market expansion consolidation, you have access to the old customers of both merging parties. However, when this type of merger occurs, the business is bound to grow – and with that growth, you will attract new customers.
4. Geographic Reach: If you merge with another company from another region, state, or country, you may choose to relocate. This will help you better reach customers in new markets. 
   • In addition, perhaps the company you are merging with has access to many other technology resources. So, in addition to the broader market, you will also be able to use their technology.
5. Product Optimization: Each market has different expectations about a product, and by reaching a new audience, you can see what your current product is missing. Plus, since you'll get lots of different ideas from your potential new teammates, you'll know what needs to be done to improve your product.

Market Extension Merger Disadvantages

When choosing a market expansion merger, you should also be aware of some downsides. These are the things you need to keep in mind. This may not always happen to all incorporated companies, but it is always possible.

This is why you must be very careful and consider all the risks before you start. Overall, the (potential) downsides are:

1. Results May Vary: This can be a good or bad thing, depending on who you are. Unfortunately, some people are not made for this kind of responsibility, which can backfire as they take on more responsibilities.
2. Investment: Consolidation can potentially produce more products for a wider audience. However, it will also require a larger workforce and likely require more equipment investment.
3. Carried Forward Debt: DebtWhile that's not always the case, when you merge with a company to expand your market, you could also end up with their debt. Most companies that incorporate a "parent" are often in debt, so you need to have a good plan to reduce that debt.

Market Extension Merger Example 

PepsiCo's Pizza Hut is a historical consolidation of a market expansion. Pepsi had observed and understood very well that people would come to Pizza Hut, hence the idea to merge with them. This gave Pepsi access to a broader market.

This merger took place in 1977, and within a year, the revenue was nearly 36 million USD, helping Pizza Hut open a new headquarters worth 10 million USD. Another excellent example of a market expansion consolidation is the merger of RBC Centura and Eagle Bancshares.

Eagle Bancshares is headquartered in Atlanta, Georgia, and has 283 employees. It has a whopping 90,000 accounts and a US asset rating of $1.1 billion.

One thing that makes Eagle Bancshares an attractive merger prospect is that it also owns Federal Tucker Bank - one of Atlanta's largest banks. When you need market share margin, this is the bank you have to go to.

When RBC Centura acquired and merged with the bank, it gained access to the North American market. In addition, the Atlanta financial market is a leader in the banking world, which presents an excellent opportunity for RBC.

Congeneric Merger

A congeneric merger occurs when two companies belong to the same industry or market but do not offer the same items. As a result, companies in a congeneric merger can have comparable distribution channels, resulting in synergies for the union.

The purchasing firm and the target company may have overlapping technology or manufacturing systems, making integration easier. The target may be a chance for the buyer to extend its product line or obtain additional market share.

A congeneric merger may allow a target and its acquirer to leverage overlapping technologies or manufacturing processes to expand their product lines or increase their market share.

This type of M&A often happens to help customers buy products in bundles instead of other bundles. In addition, it allows the company to diversify its services and thus generate higher profits.

Congeneric Merger Advantages 

The following are the primary reasons why businesses choose a concentric merger:

1. Efficient Utilization Of Resources: Concentric mergers enable organizations to use each other's operations and resources efficiently. In addition, sharing operating tools and manpower reduces additional costs. 
2. Customer Satisfaction: A satisfied and happy customer is a boon to the organization. Since similar products have been grouped in a single group, this merger makes it easy for customers to experience a full suite of products or services under one roof.
3. Expansion Of Customer Base: The merger directly or indirectly expands the customer base. The target audience can sometimes differ due to the nature of the products and services offered by the two organizations.
4. Increased Synergies: A prerequisite for mergers is the expectation of increasing market share and reducing operating costs, which in turn leads to increased profits. In addition, once merged, both organizations cater to a wide range of audiences.
5. Increased Market Share: The synergy from the merger brings stiff competition to rivals. The combined unit offers an added product/service to an expanded customer base and thus gains a higher market share. Therefore, it becomes easier to compete. 

Congeneric Merger Disadvantages 

Every merger has advantages and disadvantages. However, there aren't many drawbacks to concentric consolidation to mention. The following are some of the risks associated with this type of merger:

1. Cultural Differences: Every organization's culture is different. Merging the two units also amalgamates employees' diverse human values and business expertise, and employees may have difficulty adapting to the other party's work culture and values. 
2. Difficulty In Workforce Management: The merged entity's extensive and versatile workforce can be challenging to manage. In addition, there is a possibility of a lack of coordination between senior and middle management to implement new ideas or launch new products. 
3. Profit Sharing: In a consolidated entity, there can be a disparity in the profits generated by one product over the other resulting in a gap in size. 
4. Diversification: Since the buyer will be operating in the same market, the degree of diversification is generally considered more minor; although this may not be a "disadvantage" in itself, it should be regarded as if large-scale diversification is a strategic objective.

Congeneric Merger Example 

Here are specific examples of similar mergers:

1. Citicorp and Travelers Group

Citigroup's formation in 1998 is an example. This is the result of the merger of Citicorp and Travelers Group. These two companies operate in the same industry; however, these two companies offer different products. 

Before the merger and establishment of Citi Group, Citicorp was a traditional credit card and banking company. And although Travelers are in the same industry, they provide insurance and brokerage services.

2. Broadcom and Mobilink Telecom

The 2002 merger of Broadcom and Mobilink Telecom is also an excellent example of this type of merger. Both companies are part of the electronics industry but offer different products. 

3. Nextlink and Concentric

Another similar example was the 2002 merger of Nextlink and Concentric. Both companies belong to the same telecommunications industry. However, Netflix is ​​in the process of providing broadband services over fiber and wireless broadband.

At the same time, the other company specializes in providing Internet solutions for small and medium businesses. This merger led to the creation of an organization that offers a wide range of services to small and medium-sized enterprises, from the Internet to broadband.

Conglomerate Merger

A merged corporation consists of two companies that have nothing in common. Their businesses do not overlap or compete; however, they believe there are benefits to joining their company.

Conglomerate mergers have many reasons, such as increased market share, synergy, and cross-selling opportunities. This could be in the form of advertising, financial planning, research and development (R&D), manufacturing, or any other.

Regardless of a merger, the common belief is that a new company is better than two separate companies for all stakeholders. Companies also consolidate to reduce the risk of loss through diversification.

However, if a corporation becomes too large through an acquisition, the company's operations can suffer. During the 1960s and 1970s, corporate mergers were widespread and prevalent. Today, they are rare due to limited financial benefits.

Many opponents of corporate mergers believe they bring less market efficiency. Mainly they think this happens when larger firms acquire smaller firms, allowing larger firms to gain more market power by "sinking" and consolidating industries determined.

The banking sector is an example of a sector where large national or regional banks have primarily acquired small local banks and consolidated the sector under their control. Some well-known corporate mergers in recent times include Amazon and Whole Foods, eBay and PayPal, and Disney and Pixar.

Conglomerate Merger Advantages 

Although rare, conglomerate mergers have several advantages: diversification, a more extensive customer base, and increased efficiency.

1. Diversification: Through diversification, the risk of loss is reduced. For example, if one line of business underperforms, other better-performing business units can compensate for the loss. This can also be seen as an investment opportunity for a business. 
2. Expansion Of Customer Base: The merger also allowed the company to reach new customers, thereby expanding its customer base. In addition, this unique opportunity allows the company to market and sell new products, resulting in increased revenue.
3. Optimized Efficiencies: In addition to increasing sales in a larger market, the new business also benefits from increased efficiency as each consolidated company brings together the best practices and skills that enable the business to operate.

Conglomerate Merger Disadvantages 

Now that we've examined the advantages of a conglomerate merger, let's look at the disadvantages.

1. A Challenge For Management: Two unrelated companies merge in a conglomerate merger. Therefore, management must comprehend the new business sector, business operations, etc. As a result, companies shift their focus from core business activity to other business areas, resulting in poor performance overall.
2. Inexperienced Management: Suppose the acquiring company does not have sufficient experience in the acquired company's field. In that case, the new company will likely develop inefficient corporate governance policies, poor pricing structures, and an understaffed workforce. Experienced and inefficient.
3. Developing New Culture: In addition, it can be challenging for companies in different industries or business models to successfully develop a new corporate culture in which behaviors and values ​​are consistent with each other and aligned with the new company's mission and vision.

Conglomerate Merger Examples 

Conglomerate mergers can serve various purposes, including expanding corporate territories and product lines. Famous examples of conglomerate mergers are

1. Walt Disney Company and the United States Media Company 

This is generally considered a prime example of a corporate merger. In 1995, Disney bought ABC, entering ABC's national television business and ESPN's extensive sports coverage.

Since Disney already owned multiple cable networks at the time of the deal, this would be a mixed-use conglomerate merger, opening up new and expanding content and distribution options for Disney.

2. eBay and PayPal 

In 2002, eBay took over PayPal, which allowed it to streamline the payment process for its goods.

This merger combined the vendor talent represented by eBay's product platform with PayPal's streamlined electronic payment processing platform, which was already popular with consumers.

The two companies parted ways in 2015, but this is the first time they've worked together on a long-term revenue-sharing agreement.

3. COMCAST and UNIVERSAL Merger 

This merger was completed in 2011. He's created a media empire that oversees how TV shows and movies are made and how they reach consumers' homes through Comcast's vast network.

Given the current social and business environment created by COVID-19, Comcast customers are increasingly turning to the company's platforms for their entertainment and business needs across multiple technology stores, making this merger even more valuable and opportunistic.

Researched and authored by Kavya Sharma | Linkedin

Reviewed by Rohan Joseph Sajan | LinkedIn

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