What are the Different Types of Corporate Mergers?

Merger is a common business exit strategy as well as a critical growth tool.  But what exactly do you envision when you hear the term “merger?” Just as there are a number of business structures to consider when planning a new business launch, there are also a number of merger structures based primarily on differences in purpose of the business transaction, economic function and the relationship, if any, between merging companies.

True, the scale and structure of your business, as well as the products and services you produce and a number of other factors, mean not all merger types will be options for your own company, but it can still be helpful to understand the types of mergers taking place and how they impact not only the merging firms, but competitors as well.

Here are five of the most common merger structures, some of which may have applicability to your own business goals.

Conglomerate Merger

The term “conglomerate” is sometimes used incorrectly to refer to a very large company. But a conglomerate is more precisely the coming together of two companies with unrelated business activities or in unrelated geographical areas. Conglomerate mergers can be further divided into two subcategories: pure and mixed.

A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while they have unrelated business activities, are actually trying to gain product or market extensions through the merger.

In a conglomerate merger, the two markets continue to face the same competitors they faced prior to the merger. An example often held up as a conglomerate merger was the coming together of Walt Disney Company and the American Broadcasting Company.

There are a number of commonly accepted advantages to conglomerate merger, including reduction of investment risk due to diversification. However, there are also a number of disadvantages, including the fact that accounting can become extremely complex, making it easier for managers to hide things and more difficult for investors and analysts to uncover them.

Horizontal Merger

Unlike a conglomerate, a horizontal merger is one that occurs between companies in the same industry. It is the opposite of vertical integration. The businesses are often competitors, offering the same product or service. As you might guess, horizontal mergers are most common in industries with fewer total companies since competition tends to be sharper and the potential market gains much greater.

The merger of Daimler-Benz and Chrysler is a past example of a horizontal merger. Obvious advantages to horizontal merger include economies of scale and scope. A downside would be increased risk due to the lack of diversity and anti-competitive concerns.

Vertical Merger

Vertical merger is a term used to describe the merger between two or more companies that produce different goods or services that all relate to one specific finished product. Vertical merger frequently occurs when firms operating in different spaces within an industry’s supply chain, merge their operations.

An often-cited example of a vertical merger includes major cable business Time Warner Inc. merging with the Turner Corporation, which produces TBS, CNN, and other programming.

A common advantage to vertical merger is increased synergies and efficiency. However, this type of merger can also drum up concerns about anti-competitiveness. If a company were to purchase one of the few supply companies providing parts to itself and competitors, it could reduce its costs significantly compared to the costs of its competitors.

Market Extension Merger

Another example of merger types is a market extension merger. A market extension merger occurs between two companies that deal in the same products but in separate markets.

A market extension merger occurs, for example, when financial institutions offering the same services merge in their quest to expand to larger markets. Another example is when a national company mergers with a locally based company.

The goal of the market extension merger is to gain access to a larger market and therefore, a greater client base. It is critical, however, that the right business partner be identified if you are considering a market extension merger. When a local company merges with a larger, national company, the clash in business cultures can negatively impact the company’s success. In addition, what made the local company successful in the first place may become too diluted after a merger with a larger, national organization.

Product Extension Merger

A product extension merger differs a bit from a market extension market. It takes place between two business organizations that deal in related products within the same market. One of the most often-cited examples of a product extension merger is Broadcam’s acquisition of Mobilink Telecom, Inc. The former manufactures Bluetooth personal area network hardware systems and chips for wireless LAN.  The latter, Mobillink, creates product designs meant for handsets that are equipped with Global System for Mobil Communications technology. The two products complement one another. 

Advantages of a product extension merger is that it enables the merging companies to combine their products in a way that expands the client base and profits along with it. The disadvantages are that it can be a challenge to identify just the right merger partner. If one company is weak, it can end up harming the newly formed entity.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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