Corporate consolidation has changed the face of many global industries, uniting organizations through mergers and acquisitions. Although many business operations are known as mergers, a true merger must meet certain criteria. When two companies merge, there may be a variety of different reasons behind the transaction. This is why it is important to understand the different types of mergers and how they affect the corporate market.
Mergers versus acquisitions
Business operations that are often known as mergers are actually acquisitions. This is done primarily as a public relations ploy to ease resentments between the absorbed company and its main customers. A true merger occurs when two or more companies of approximately similar size come together to form a new entity. In this scenario, money does not have to change hands from one company to another.
In an acquisition, a company pays in cash or in shares for a stake in another company. The acquired company becomes part of the parent organization. Although the word “merger” is often used, most of the offerings linking independent companies are technically acquisitions.
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. The objective of a horizontal merger is to create a new organization, with the largest market share. Because the operations of the merging companies are very similar, there may be possibilities to merge certain operations, such as manufacturing and cost reduction.
A vertical merger unites two companies that may not compete with each other, but exist in the same supply chain. An auto company that teams up with a parts supplier would be an example of a vertical merger. This agreement will allow the automobile division to obtain better prices on parts and have better control over the manufacturing process. The division of parts, in turn, will ensure a constant flow of operations.
Market extension mergers
The main benefit of a market extension merger is helping two organizations, which can provide similar products and services, to grow in markets where they are currently weak. Rather than trying 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 large retail stores that sell similar products, they have been successful in different parts of the world. As a single organization, they have a diverse and global presence.
Product extension mergers
Two companies can merge when they sell products in different niches in the same markets. A high-end stove manufacturer can merge with a company that makes models on a budget. The combined organization now has a complete line of products spanning multiple prices.
Conglomerate mergers occur when two organizations sell their products in completely different markets. There may be little or no synergy between your product lines or business areas. The benefit of a conglomerate merger is that the new parent organization gains diversity in its business portfolio. A shoe company may team up with a manufacturer of water filters, according to the theory that businesses would rarely go down in both markets at the same time. Many companies are built based on this theory.