What Is A Merger? A Definitive Guide With Examples And Types
Updated 19 January 2023
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Corporate mergers can be one of the most efficient ways to increase a company's profits and productivity. Mergers are large-scale, mutually beneficial business deals. If you are researching a career in business or expect to experience a company merger in the future, you may be interested in learning about the individual components of a successful merger. In this article, we define what is a merger, why mergers take place, examine the difference between a merger and an acquisition and discuss the five different types of mergers.
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What Is A Merger?
A merger is the act of two separate businesses combining to become one company. To be a merger and not an acquisition, the companies are supposed to have similar sizes, values, and customer bases. If both parties expect to benefit from the merger, it qualifies as a "merger of equals." The goal of merging companies is to form a brand new entity that is better and stronger compared to the two parts when they were on their own. Ideally, both merging companies' shares increase in value during and after their union.
Successful mergers can accomplish a variety of results. Companies that merge often gain market share, reduce production costs, expand to new locations, increase profits and combine the manufacturing of common products. All of these results directly benefit the new company's shareholders. After a merger, the management distributes the shares in the new company to the previous companies' original shareholders. Companies usually merge with the objective of becoming more competitive. A good merger benefits both parties by giving them better access to resources, customers, products, technology, and other assets.
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Why Do Mergers Take Place?
Mergers may take place because of one or more of the below reasons:
Synergies between the two companies
A merger between two companies may take place when the strengths of the two companies complement each other. In such cases, the overall efficiency in the operations of the combined entity is going to be better than the two individual companies. The cost of operations is also likely to decrease when there is a positive synergy between the two merging companies.
Mergers may lead to growth in the market share of the combined business. If a merger takes place between two competing companies, then the resultant entity may have the market share of both companies put together. The resulting entity may also be able to attain more market share because of newer branding opportunities or improved processes.
Enhance supply chain
When two companies merge, where one company was a supplier for the other company, then the costs for the resultant company are going to be significantly lower as the supplier margin will decrease. If a merger happens where one company is the distributor for the other, then the distributor margins cease to exist. So mergers may enhance supply chain capabilities and increase margins as a result.
Two smaller companies may choose to merge to compete with a larger company having a significant market share. Two companies having the majority of the market share may choose to merge to gain an advantage over other players in the market. So managing competition is another major reason why companies may opt for mergers.
What Is The Difference Between A Merger And An Acquisition?
Acquisitions and mergers involve somewhat similar considerations and concepts, but there are a number of significant differences. Here, we discuss them to help identify the differences:
Acquisitions are not mutually beneficial. In acquisitions, one company usually purchases another company and assimilates its assets. In this case, the company that gets acquired often ends up losing its identity and melds with the acquiring business. Acquisitions as a whole are purchases rather than agreements.
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A key difference between mergers and acquisitions involves the idea of brand identity. In a merger, the two parties join to become one, and their existence as separate individual entities ceases to exist. Rather than retaining their old identities, the new entity usually goes by a new brand name that inherits certain aspects of both companies. Mergers usually mutually benefit both parties, with each increasing their value and efficiency by becoming one. In a merger, instead of one company taking over the other, both companies make a mutual agreement to increase their profits and influence.
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Types Of Mergers
Below are the five different types of mergers:
Vertical mergers are when companies that have their operations at the various stages of a production chain merge. These companies may be producing different parts or services that combine to make one finished product. A vertical merger can be profitable when the two companies agree to unite, along with their equipment, facilities, and employees for better productivity. A vertical merger may help in reducing production costs, streamlining product development, and optimizing operational expenses.
Mergers can be a profitable business decision for a variety of companies in a multitude of situations. If both companies benefit, a merger can be instrumental in increasing productivity and market value. Mergers can be risky because, to facilitate a mutually beneficial merger, it is important for both companies to be willing to negotiate and compromise. So, if the new company has better profits, greater reach, and is a more influential competitor in its industry, you may say the merger was a success.
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A product extension is a type of merger in which two companies participate, and these two companies have their operations in one industry. These companies may have some kind of overlap in the development process for products, strategies used for marketing, the technology used, and their research practices. In the event of a product extension merger, the new company manufactures the products from the original companies. The new entity has access to a wider customer base, an enlarged research archive, and a new team of specialized personnel.
Product extension mergers typically take place between companies whose products already complement each other, like a social media platform and a photo editing mobile application. Combining these products can allow technology integration and ideally combine the respective customer bases.
A conglomerate merger is the combination of two companies that are involved in unrelated business activities. The companies might be in two different industries or separate locations. A pure conglomerate involves two firms that truly have nothing in common. A mixed conglomerate happens when brands stand to gain product or market extensions through the merger.
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Corporations only merge if they expect their shareholders to profit from the deal, so they carefully negotiate these kinds of mergers. An example of a conglomerate merger is a fashion accessory brand merging with a paper products company. The new company may still face the same competition as before, but it can benefit from its increased resources.
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This type of merger takes place between two companies operating in the same industry. Commonly, a horizontal merger may involve two competitors choosing to join each other. In industries having few brands, organizations offering similar services or products may find it mutually profitable for them to merge. Forming a new entity with a significantly larger target audience and better resources may increase the value for the shareholders in such cases.
A good example of a horizontal merger may be when two bicycle manufacturers merge to beat their competitors. In such a case, a horizontal merger may involve rebranding, revising company policies, and maybe even redesigning the production facilities.
Market extension mergers
Market extension mergers are deals that occur between companies that sell the same products but in different markets. When companies initiate a market extension merger, they gain access to a bigger market and a more diverse customer base.
A soft drink company based in the United States merging with a soft drink company in Japan can be an example of a market extension. This merger can allow the newly formed company to sell its products in both countries without the cost of opening new facilities, training new employees, or securing international vendors.
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