What is a Company Merger?
Definition: A company merger can best be described as the union between two companies in the same industry to form one corporate entity. Mergers are common in many sectors, especially competitive segments, where a merger makes sense in terms of synergies and operational efficiencies.
Often mergers involve two smaller companies competing with more prominent players in the same industry. Merging allows the resulting company to have a larger market share. Note that the companies that come together to form a merger usually do so if the management and stakeholders are sure that it is the right direction.
Benefits of a Business Merger
There are operational efficiencies that allow the resulting firm to reduce its operational costs.
The merging firms gain more market share as the resulting company that is created from the merger.
Mergers provide an opportunity to reach out to new markets primarily because the resources from the two merging companies may support such a move when combined.
The merger enjoys more revenue since two competitors become one and also courtesy of the resulting efficiencies.
Mergers provide an avenue for the merging firms to survive harsh economic conditions or too much competition in the market.
5 Types of Company Mergers
Mergers can be grouped into five distinct categories.
Conglomerate
This is the type of merger that occurs between two companies that might be in different industries. These types of mergers are not as common, but they do happen, especially when companies are interested in diversifying or expanding their product line. One of the best examples of this merger type is that between the American Broadcasting Company (ABC), which is a commercial broadcast network and Disney, which operates as an entertainment company.
Horizontal merger
This is the most common type of merger where two companies competing in the same industry and the same product line come together. This type of merger usually happens so that the involved companies can pursue a more significant market share, synergies, and economies of scale. One of the best examples of a horizontal merger is that of SmithKline Beecham and Glaxo Wellcome to form GlaxoSmithKline.
Vertical merger
This type of merger involves companies in the same industry but different segments of the supply chain. For example, one company may produce a product that is then used by another company to make a complete product that is ready for consumption by the end-user. A company that manufactures phones might thus merge with a company those manufacturers smartphone displays. One of the best examples of such a merger is that of Time Warner and American Online.
Product extension merger
This is the type of merger is also known as a congeneric merger. Such mergers happen between two companies that operate within the same market, but they sell different products that are related, or they complement each other. Imagine one company that makes plates, and then another company makes spoons. It makes sense for such companies to merge to reach customers more efficiently.
Market extension mergers
this is the type of mergers that happens between two firms that exist in different markets, but they offer similar products. Such a merger would be aimed at expanding the clientele or reaching a wider market. An example of such a merger would be a situation where a bank merges with a debit card company.
Summary
There are different reasons for which mergers take place, but the common thing between all types is that there are synergies to be had, and it has to make sense as a means for the business to survive in the future. Some industries, such as the pharmaceutical industries, are a high merger count.
If you do a little bit of research, you will find out that the merging companies get access to data from years of development and resources which they would otherwise have to take decades to achieve on their own.