What Are Different Types of Mergers?
Corporate consolidation has changed the faces of many global industries, joining organizations together through mergers and acquisitions. Although many business deals are referred to as mergers, a true merger must meet certain criteria. When two companies merge, there may be a variety of different reasons for the deal. This makes it important to understand the various types of mergers and how they affect the corporate marketplace.
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Mergers Versus Acquisitions
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Business deals are often referred to as mergers when they are really acquisitions. This is mainly done as a public relations ploy to soften any hard feelings among the company being acquired and its key customers. A true merger occurs when two or more companies of roughly equal size come together to form a new entity. In this scenario, money need not change hands from one company to another.
In an acquisition, a company is paying cash or stock for an ownership stake in another company. The acquired company then becomes part of the parent organization. Although the word "merger" is used often, most deals that join separate companies are technically acquisitions.
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Horizontal Mergers
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Horizontal mergers occur when two companies sell similar products to the same markets. A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
Vertical Mergers
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A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business.
Market Extension Mergers
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The main benefit of a market extension merger is to help two organizations that may provide similar products and services grow into markets where they are currently weak. Rather than try to establish a retail presence in Europe, Wal-Mart could merge with a European retailer that is already successful and has good brand recognition. Even though the two organizations are both big-box retailers selling similar products, they have found success in different parts of the world. As a single organization, they have a diverse, global presence.
Product Extension Mergers
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Two companies may merge when they sell products into different niches of the same markets. A manufacturer of high-end stoves may merge with a company that makes budget-conscious models. The combined organization now has a complete product line that spans various price points.
Conglomerate Mergers
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Conglomerate mergers occur when two organizations sell products in completely different markets. There may be little or no synergy between their product lines or areas of business. The benefit of a conglomerate merger is that the new, parent organization gains diversity in its business portfolio. A shoe company may join with a water filter manufacturer in accordance with a theory that business would rarely be down in both markets at the same time. Many holding companies are built upon this theory.
References
- Photo Credit Image by Flickr.com, courtesy of Steve Jurvetson
