About Business Mergers
Business mergers are complex processes in which two companies become one. Every merger is unique; however, all mergers also have certain things in common. Business mergers may be friendly or hostile, both parties must agree on a price, the deal has to get government approval and the companies must have a plan for integrating two separate parts successfully. However, not all business mergers are successful.
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Definition
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As Investopedia reports, mergers usually involve mutual agreement between the two parties. Sometimes, one company's management will be against the deal (e.g., if it thinks the price is too low or that it has a better chance of succeeding on its own). This kind of hostile merger is not uncommon, as management often only relents after pressure from the board of directors or company shareholders. Four main kinds of business mergers exist: horizontal mergers, vertical mergers, congeneric mergers and conglomerate mergers.
Horizontal Mergers
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A horizontal merger occurs when two companies that offer similar goods or services decide to combine their operations, usually to take advantage of economies of scale. One example is the Chrysler merger with Daimler-Benz.
Vertical Merger
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Sometimes two companies that make goods or services that are different but serve the same specific finished product merge. This vertical merge between, for example a producer and supplier, reduces dependence and can increase profits. A company that makes cars buying another company that makes tires is one example of a vertical merger, resulting in the car company gaining control over its supply of tires so as to no longer be at the mercy of the market.
Congeneric Mergers
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A congeneric merger happens between two companies in the same industry that do not offer the same products. An example would be a bank buying an insurance company, since both are in the financial industry, but offer different products.
Conglomerate Merger
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Conglomerate mergers are between two large companies whose products and services have nothing in common. Such companies may merge simply to gain market share, to diversify their risk, or to acquire new markets for their products.
Government Approval
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Often, two companies that want to merge have to get government approval. The Department of Justice has different regulations for different kinds of mergers, but the goal of all these anti-trust laws is to ensure that companies cannot combine and create a monopoly.
Failures
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Not every merger is a success. It can be difficult to blend two corporate cultures, and some valuable talent may be lost to competition during the process. Mergers between two very large companies, such as the ill-fated Time Warner-America Online deal, are especially difficult. The 1960s saw many ultimately unsuccessful conglomerate mergers.
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