Simply put, a merger is when two existing companies join together to form a new corporation. Mergers happen on a regular basis, and there are several reasons two companies choose to combine under a single, unified name. This explanation may help you understand why mergers happen and the various types of company mergers.
Mergers Simplified
As mentioned before, a merger is when two businesses become one and start a new company. There are many reasons a merger may happen. One of the biggest reasons firms choose to merge is to expand their reach or to gain more segments. Another reason mergers happen is because it can be beneficial to both groups due to gains in market share. There are five major types of mergers that occur: conglomerate, horizontal, market extension, product extension, and vertical.
Conglomerate Merger
Conglomerate mergers involve two firms that have unrelated business ventures. An example of this is a soft drink company merging with a company that manufactures athletic shoes. Under conglomerate mergers, there are pure and mixed mergers. Pure means that the firms have nothing in common, but mixed is when the businesses are looking to expand their market.
Horizontal Merger
A horizontal merger is when two companies within the same industry combine. For example, if two businesses in the field of telecommunications are merged, then it would be classified as a “horizontal” move. A horizontal merger often happens when there are only a few firms in the field. This allows the businesses to be higher and gain increased market share, potentially making them one of the biggest companies in their sect.
Market Extension Merger
Market extension mergers take place between two companies that deal with the same product, but in different markets. For example, if a local software company is taken over by a multinational software developing company, then it’s considered a market extension merger. It’s beneficial because it allows both groups to have a larger market and client base.
Product Extension Merger
Product extension happens when two firms merge because the products are related to each other and operate in the same market, but aren’t exactly the same. Groups have the opportunity to access a bigger set of consumers because their products are combined. An example of this could include the merger of a handset development group with a telecommunications company. Product extension helps the combined company to earn higher profits, which is beneficial for both participants.
Vertical Merger
A vertical merger is when two organizations that produce two different goods come together to create a product after the merger. If an automobile company combined with a parts supplier, it could produce vehicles at a lower price and have more control over the parts received during manufacturing. In turn, the auto parts supplier would have constant business.