Different Types of Mergers

In perspective of merger and acquisition there are different types of mergers that host a difference between each one it. Each merger derived with specific reasons depending on the fitting characteristics in cross boarder operation. Each type of merger will be discussed in detail to know the differences and their characteristics.

1. Horizontal Merger

It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firm’s operations in the same industry. Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger.

In case of horizontal merger, the top management of the company being meted is generally, replaced, by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade.

Weinberg and Blank define horizontal merger as “A takeover or merger is horizontal if it involves the joining together of two companies which are producing   essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers involve a reduction in the number of competing firms in an industry, they tend to create the greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities.”

2. Vertical Merger

It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products).

“A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and reducing stock holding and handling costs, where, however there is a degree of concentration in the markets of either of the companies, anti-monopoly problems may arise.”

3.   Co-generic Merger

In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

Co-generic mergers classified into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market   either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger.

4.   Conglomerate Merger

These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally (in the sense of producing the same or competing products), nor vertically (in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factors.

Conglomerate mergers are unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. However these transactions are not explicitly aimed at sharing these resources, technologies, synergies or product market strategies. Rather, the focus of such conglomerate mergers is on how the acquiring firm can improve its overall stability and use resources in a better way to generate additional revenue. It does not have direct impact on acquisition of monopoly power and is thus favored through out the world as a means of diversification.

5. Geographical Merger

Most of the mergers are limited within the operating firms in the same territory (home country). Always merger activities refers to the strengthening the cross-border relation with other nations. This type of mergers has the different motives when compared to other mergers. Most of mergers will takes place within the country, but over the decades there is been numerous cross-border mergers happened between many nations (international merger). Larger firms are very much interested to merge whether it might be international or domestic. This enables the expose with different market and certainly to make more profitable.

Geographical merger is an important instrument for efficient to provide sustainable growth. It is the best means to provide risk diversification during cross border merger. Geographical mergers will provide to diversify the business in different markets which allows the acquirer to allocate basic requirements based on operation.

6. Market-Extension Merger and Product-Extension Merger

In the modern days of merger integration these two mergers has become the frequent types and more importantly it is the best means of extending the operations through extend products and services.

  1. Market-Extension Merger: In this type the merger takes place between the companies having the similar products and services in different market places. The actual intention for having market extension is to target the sustainable market for the future growth and to maximize the wealth of shareholders. The approach of this merger type is basically suits the market extension merger that took place between the Tata-Corus and Arcelor-Mittal. This made Arcelor-Mittal to produce the highest capacity steel production in the world about 100 million tonnes. The major advantage of this type is to become the monopoly and to have the huge market value.
  2. Product-Extension Merger: In this type of merger organizations makes a deal were the business takes place with similar products and which operates in the same market place. Mainly this type will allow any new or any large company to unite its products and services to capture same market with bigger consumers. Certainly this method of merger will earn higher profit.

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