Mergers and acquisitions are invaluable tools when it comes to corporate strategies for growth and development.
Companies that implement proper merger plans stand to gain both increased access to resources, customer base, and a larger market share all at the same time.
Mergers happen more often than you may think – in fact, over 10,000 of them happened globally in 2019 alone!
But what exactly is a merger?
What type of mergers in business are there? What are pros and cons of mergers?
In this post, we’ll answer these questions and give an overview of everything you need to know about mergers – from definitions & types to examples & benefits – so you can be better informed on how they can help your organisation achieve its full potential.
Lets’ dive in
What is a merger?
Merger is a type of corporate strategy in which two companies join forces to create a larger single entity.
This involves the consolidation of ownership, management, and operations, which can bring many benefits to both companies, such as increased market share, economies of scale, improved efficiency, diversification of products and services, access to new resources and technology.
Mergers can have a significant impact on the companies involved, their employees, customers, and stakeholders. The success of a merger often depends on careful planning, integration, and management of the merged companies’ operations and cultures.
08 Types of Mergers in Business
There are 08 types of mergers in business and their details are as follows:
1. Horizontal merger
A horizontal merger is when two companies that operate in the same industry join forces. This type of merger allows the companies to combine their resources and talents, as well as their customer base, in order to become more competitive against rivals.
In 2019, Disney acquired most of 21st Century Fox’s assets, including its film and television studios, cable networks, and international operations. The merger allowed Disney to expand its media empire and content offerings.
In 1999, ExxonMobil, the world’s largest oil company, merged with Mobil, a major oil and gas producer. The merger created a dominant force in the oil and gas industry, with significant economies of scale and increased bargaining power.
2. Vertical merger
A vertical merger is when two companies that operate at different levels within an industry join forces. For example, a company that manufactures cars might merge with a company that sells car parts or a company that provides car financing. This type of merger can help companies expand their reach into new markets or channels and improve coordination between different parts of the supply chain.
A notable example of vertical integrations include the merger between Fiat Chrysler Automobiles (FCA) and PSA Group in 2019. The merger between Fiat Chrysler Automobiles (FCA) and PSA Group in 2019 is a notable example of vertical integration. This merger created the world’s fourth-largest auto manufacturer and was the largest automotive merger ever, worth an estimated $50 billion.
3. Conglomerate merger
Conglomerate is a merger when two or more companies that have unrelated business operations join forces to form one larger entity. This type of merger allows the new company to diversify its product offerings, reduce costs and improve efficiency.
In 1996, Berkshire Hathaway, a holding company with diverse businesses ranging from insurance to retail to energy, acquired GEICO, a leading provider of auto insurance. The merger allowed Berkshire Hathaway to diversify its portfolio and expand its insurance business, while GEICO benefited from the financial stability and resources of a larger conglomerate.
4. Congeneric merger
Congeneric is a type of merger that involves two companies in different industry sectors but with related business operations. This type of merger allows companies to combine their resources, talents and customer base to create a larger, more competitive single entity. Companies can also benefit from the combined knowledge of each other’s sector and use it to further innovate their products.
One of the most notable examples of a congeneric merger is Royal Dutch Shell’s acquisition of BG Group in 2016. The deal was valued at £47 billion and created one of the world’s largest integrated oil and gas companies.
5. SPAC merger
A SPAC, or Special Purpose Acquisition Company, is a type of publicly traded company that is formed for the sole purpose of acquiring another company. In a typical SPAC merger, the target company will be acquired by the SPAC in order to take it private. This can provide many benefits to the target company, such as access to capital, increased efficiency, and improved profitability.
6. Reverse merger
Reverse merger is a type of merger where a private company merges with a publicly-traded shell company to become publicly traded. In this type of transaction, the private firm usually agrees to pay for the shell company’s unregistered stock and then transfers their assets and other business operations into the shell company’s structure.
This allows the private firm to access the capital markets and raise funds more easily without having to go through the lengthy and expensive process of an initial public offering (IPO). Reverse mergers can also be used as a way for established companies to make acquisitions without having to issue new stock.
This type of transaction is attractive because it allows companies to quickly become publicly traded without having to go through the traditional process of an Initial Public Offering (IPO). Reverse mergers also provide private companies with access to capital markets, allowing them to raise funds more easily than they would have been able to with a conventional IPO.
7. Market extension merger
Market extension merger is a type of merger where two companies with different products in the same industry decide to join forces and create a larger entity. This type of merger allows the new company to expand its reach into different markets, increase its market share, and reduce costs.
Market extension mergers are a great way for companies to expand their reach and increase market share. For example, a company that manufactures cars might merge with a company that provides car parts. This type of merger would allow the newly formed entity to provide both services to customers, allowing them to serve more customers and increase their market share.
8. Product extension merger
Product extension merger is a type of merger where two companies that produce similar products join forces to create one larger entity. This type of merger allows the new company to extend its product offerings, increase its market share and reduce costs.
Product extension mergers are usually done with companies that have established brands and products, or ones that have the potential to become successful in the future. This type of merger can be beneficial for both companies as it allows them to expand their product and service offerings, increase their market share, and reduce costs.
Product extension merger can also help a company break into new markets or enter existing markets in which it has not previously been active. This type of merger allows the merged entity to gain access to a larger customer base, potentially increasing their overall market share.
Pros and cons of mergers
There are a variety of pros and cons of mergers and following are some of the common lessons that are taken from experiences of many businesses.
Increased market share
Mergers can help companies increase their market share and reach larger markets. This is especially true in the case of horizontal mergers, which combine two similar or competing companies and allow them to become stronger and more competitive against rival firms.
Economies of scale
Mergers can also help companies achieve economies of scale, where costs are reduced as production increases. When two companies merge and increase their production, they can benefit from lower unit costs and cost savings associated with shared resources such as personnel, technology, facilities and equipment. This can help the combined company become more competitive in its industry.
Access to resources
Mergers can provide companies with access to additional sources of capital and resources. For example, when two companies merge, they can combine their financial resources to fund new projects or research and development initiatives. This type of merger can also help companies diversify their product offerings and enter new markets or segments.
Access to new products and services
Mergers can also provide companies with access to new products and services. For example, when two companies merge, they can combine their existing product portfolios to create a more diverse offering that caters to a larger customer base. This type of merger can also help companies overcome barriers to entry in certain markets or regions, as these barriers are often created.
When two companies merge, they can often streamline their operations and eliminate redundancies, resulting in cost savings and greater productivity. This increased efficiency can improve the merged company’s profitability and competitiveness in the marketplace. However, proper integration of operations, systems, and staff is crucial to realizing the benefits of increased efficiency.
Merging entities can benefit from the combined expertise, customer base, and resources of the two companies, leading to increased revenue growth and competitive advantage. Synergy can result in increased profitability and shareholder value for the merged company, making mergers an attractive strategy for companies looking to grow and improve their financial performance.
Mergers can also be associated with a variety of disadvantages to both companies involved.
Difficulties do arise when two companies merge because they may have different structures, processes, and ways of doing business, making it challenging to integrate their operations seamlessly. Integration challenges can lead to delays, disruptions, and employee disengagement, resulting in a decline in productivity and profitability. Failure to overcome integration challenges can result in the failure of the merger or suboptimal performance of the merged company.
Merging companies may have different values, beliefs, communication styles, and ways of doing business, which can create misunderstandings, conflicts, and resistance to change. Cultural differences can affect the integration process, as employees from both companies may struggle to adjust to the new culture and working environment. This can lead to a decline in productivity, morale, and employee engagement, and ultimately, affect the success of the merger.
When two companies merge, they can create a dominant market position, reducing the level of competition in that market. As a result, the merged company may have more market power, which can lead to higher prices for customers, reduced innovation, and decreased customer choice. With fewer competitors, the merged company may have less incentive to improve its products or services or invest in research and development. The reduction in competition can also make it difficult for new entrants to enter the market, limiting potential innovation and competition in the long run.
Mergers can involve significant costs, including legal fees, restructuring expenses, and debt financing, which can increase the debt burden of the merged company. The increased debt can affect the financial stability and creditworthiness of the merged company, making it more vulnerable to economic downturns and changes in interest rates. Moreover, the increased debt can limit the merged company’s ability to invest in research and development or expansion, as it may need to prioritize debt repayment.
Mergers may require approval from government agencies, which can delay or even prevent the merger from going ahead. Regulatory scrutiny may focus on the potential impact of the merger on competition, pricing, or consumer choice, among other factors. Regulatory approval may also require the merged company to divest certain assets or make concessions to address any antitrust concerns. Moreover, regulatory approval may not be guaranteed, which can result in a significant setback or failure of the merger.
Loss of talent
Loss of talent can also be a significant disadvantage of mergers, as they can result in redundancies and job losses, which can lead to the loss of talented employees and a decline in morale. The uncertainty and anxiety created by the merger process can also lead to a decline in productivity and engagement among remaining employees. Losing talented employees can also affect the merged company’s ability to compete, innovate, and grow, as it may struggle to replace key staff or retain critical knowledge and expertise.
Merger is a business strategy that companies can use to expand their business, increase market share, and add to their product line. There are several different types of mergers in business and each has with its own pros and cons. The key is to select the type of merger that is most advantageous for your company. If you understand the different types of pros and cons of mergers you can determine if a merger is the right move for your business.