Top 5 types of Mergers
A merger refers to an agreement where two companies join together to form a single firm. It basically is the combination of two companies into a single legal entity. Earlier on, Anand Jayapalan had discussed how a merger is a business deal where two existing, independent companies tend to in order to form a new, singular legal entity. Mergers are voluntary. Usually, both companies in a merger are of a similar size and scope, and both of them stand to gain from the transaction.
Mergers can happen for a myriad of reasons. They may aid each company to enter a brand new market, offer a new service, or sell a new product. Mergers can also lower the operational expenses of the companies, improve management, reduce tax liabilities, and change their pricing models. However, ultimately, most companies to merge with the aim of increasing size, scale, and revenue.
Mergers can be of multiple types, such as:
- Conglomerate: This type of a merger is done between companies that are involved in wholly unrelated business activities. Conglomerate mergers can be of two types, pure and mixed. Pure conglomerate mergers are known to take place among companies that have nothing in common. On the other hand, mixed conglomerate mergers involve businesses that are looking for product or market extensions.
- Horizontal merger: Horizontal merger typically takes place between companies that belong to the same industry. It is a type of a business consolidation that tends to take place between businesses that operate in the same space, commonly as competitors that provide the same good or service. Horizontal mergers are most common in industries that have fewer firms, as the competition level among them tends to be greater. Moreover, the synergies and potential gains in market share are much greater for merging firms in such instances.
- Market extension mergers: A market extension merger takes place between two businesses that deal with the same products but in separate markets. Making sure that the merging companies are able to gain access to bigger markets and enjoy a bigger client base are the key goals of such mergers.
- Product extension mergers: Product extension merger happens between two companies who deal in products that are related to each other, as well as operate in the same market. With such mergers, companies are able to group their product and gain access to a larger customer base. This ultimately helps businesses to earn higher profits.
- Vertical merger: Such a merger takes place between two companies that produce different goods or services for a specific finished product. Vertical mergers take place when two or more firms that operate at different levels within an industry’s supply chain tend to merge their operations. Increasing synergies created by merging firms so that they would be more efficient while operating as one is generally the prime aim of vertical mergers.
Earlier, Anand Jayapalan mentioned that mergers are commonly spearheaded and facilitated by an investment banker. They are the ones to source deals, value companies, forecast outcomes, and make sure both companies have their houses in order.
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