An extensive appraisal of each merger scheme is done to patternise the causes of mergers. These hypothesized causes (motives) as defined in the mergers schemes and explanatory statement framed by the companies at the time of mergers can be conveniently categorized based on the type of merger. The possible causes of different type of merger schemes are as follows:
Horizontal merger: These involve mergers of two business companies operating and competing in the same kind of activity. They seek to consolidate operations of both companies. These are generally undertaken to:
- Achieve optimum size
- Improve profitability
- Carve out greater market share
- Reduce its administrative and overhead costs.
Vertical merger: These are mergers between firms in different stages of industrial production in which a buyer and seller relationship exists. Vertical merger are an integration undertaken either forward to come close to customers or backwards to come close to raw materials suppliers. These mergers are generally endeavored to:
- Increased profitability
- Economic cost (by eliminating avoidable sales tax and excise duty payments)
- Increased market power
- Increased size
Conglomerate merger: These are mergers between two or more companies having unrelated business. These transactions are not aimed at explicitly sharing resources, technologies, synergies or product .They do not have an impact on the acquisition of monopoly power and hence are favored through out the world. They are undertaken for diversification of business in other products, trade and for advantages in bringing separate enterprise under single control namely:
- Synergy arising in the form of economies of scale.
- Cost reduction as a result of integrated operation.
- Risk reduction by avoiding sales and profit instability.
- Achieve optimum size and carve out optimum share in the market.
Reverse merger: Reverse mergers involve mergers of profir making companies with companies having accumulated losses in order to:
- Claim tax savings on account of accumulated losses that increase profits.
- Set up merged asset base and shift to accelerate depreciation.
Group company mergers: These mergers are aimed at restructuring the diverse units of group companies to create a viable unit. Such mergers are initiated with a view to affect consolidation in order to:
- Cut costs and achieve focus.
- Eliminate intra-group competition
- Correct leverage imbalances and improve borrowing capacity.