Common Types of Mergers

 

At some point or the other, business leaders may want to join forces with another enterprise in order to cut costs or boost profits. Earlier, Anand Jayapalan had spoken about how one of the best ways to do so is to merge the business with another company through a merger. A merger implies to an agreement where two companies join together in order to form a single, new enterprise. It basically is the combination of two companies into a single legal entity. In case of a merger, both companies have to voluntarily merge with each other.

There are several reasons why businesses may opt to merge, including:

·         Gaining market share

·         Increasing efficiency

·         Cutting costs

·         Boosting profits

·         Expanding into new segments

·         Diversifying offerings

·         Getting a competitive advantage

There are many companies that use a merger as a business exit strategy, while several others may use a merger for business restructuring. Businesses that merge are generally similar in terms of scale of operations, customer count and size. Subsequent to a merger, the shares of the newly merged company would be distributed to existing shareholders of both businesses.

Here are some of the common types of mergers:

Conglomerate: This involves a merger between firms that are involved in wholly unrelated business activities. Conglomerate mergers can be of two types, mixed and pure. Pure conglomerate mergers involve companies that have nothing in common, while on the other hand, mixed conglomerate mergers involve enterprises that are looking for product extensions or market extensions.

Horizontal merger: Such mergers take place between companies in the same industry. Horizontal mergers imply to a business consolidation that takes place between companies operating in the same, commonly as competitors that provide the same good or service. Horizontal mergers tend to be common in industries that have fewer firms. After all, competition would be higher in these industries, and so would be the synergies and potential gains in market share.

Market extension mergers: These mergers take place between two enterprises dealing with the same products, but in separate markets. The key goal of a market extension merger tends to be to make sure that the merging enterprise is able to gain access to a bigger market client base.

Product extension mergers: A product extension merger happens when two companies that produce related products and operate in the same market decide to combine. Such mergers enable companies to consolidate their product lines and ultimately reach a larger customer base, leading to increased profits.

Vertical merger: A vertical merger basically involves two enterprises that produce varied types of goods or services for a single final product. It takes place when companies at varied stages of the same industry's supply chain merge their operations. The primary rationale behind a vertical merger is often to enhance synergies, thereby making the combined entity more efficient than the individual companies operating separately.

Earlier, Anand Jayapalan had spoken about how synergy is a concept as per which the combined value and performance of two companies exceed the sum of their separate contributions. It is a key reason behind many mergers.