What is a Merger?
A merger is identified as an agreement between two existing business organizations to join together into one business organization. With the increasing nature of globalization and complexity of business activities, some businesses decide to join together and work as a single organization to face the competition strongly.
A merger is a voluntary decision of two businesses to get together and work as a single organization. When getting together to operate as a single organization, they agree with certain terms and conditions to function as a new legal entity. Usually, the firms that agree to merge are equal in size, the number of customers, and the scale of operations. When a similar type of business is getting merged, the term ‘merger of equals’ is used.
The concept of acquisitions is usually connected with the term merging. However, it has a totally opposite way of operating as it is generally not voluntary and one business purchases another business.
There are many reasons for business organizations to merge with other businesses. Gain more market share, expand the business to new markets, increase revenues, face growing competition, get together for manufacturing common type of products are a few reasons for the businesses to merge with other businesses.
Whatever the reason makes the businesses merge with another company, the ultimate expectation is to increase the values of the shareholders and investors of the businesses. After implementing a company merge, shares of the new company are distributed among the existing shareholders of both original business organizations.
Types of Mergers
There are five types of mergers that can be seen commonly in the modern business world.
01. Horizontal Merger
A horizontal merger is a type of merger between two companies in the same business industry. It is a business consolidation that happens between two business organizations that operate in the same business space. These businesses are often identified as competitor businesses that offer similar types of products or services.
Horizontal mergers are commonly seen in business industries with fewer firms. When the competition in the industry is higher and the potential of gaining success and competitive advantage in the market is much higher when merged with another business than operating as separate businesses.
A conglomerate is a merging method of two businesses that are operating in totally unrelated business activities. Two main types of conglomerate merging methods are identified in the modern business world.
– Pure conglomerate – This is a method of merging that involves firms with no common nature in their business functions.
– Mixed conglomerate – This method involves merging businesses that are planning to gain product extensions or market extensions.
03. Vertical Merger
A vertical merger is a merger between two companies that produce different products or services for one specific finished product. Merging companies vertically happens when two or more business organizations within a particular business industry’s supply chain decide to join together with a merging agreement. One of the most common reasons for this type of merging is to increase efficiency and productivity by operating together.
04. Market extension merger
This is a merger that happens between two companies that deal with the same product but in different markets. The main purpose of these types of merging is to ensure that the merging business organizations can access a bigger market share and get a higher potential customer base.
05. Product extension merger
Product extension merger is a type of merger between two business organizations that deal in products or services that are related to each other and operate in the same market. This type of merger allows the businesses to group their products together, face fierce competition successfully, and access a bigger set of customers while increasing profits.