What do we call the combining of 2 or more firms competing in the same market with the same good or service?

Small businesses conduct mergers and acquisitions for the same reasons large corporations do – to strengthen positions in one or more markets, gain access to new markets, increase efficiency or just diversify a company's offerings. There are several types of merger strategies of particular interest to small businesses and each has something to offer depending on your company's goals.

The three main types of merger are horizontal mergers which increase market share, vertical mergers which exploit existing synergies and concentric mergers which expand the product offering.

A discussion about corporate combinations should note that, strictly speaking, true mergers are rare. A merger occurs when two companies come together as equals and form an entirely new company. Many business combinations billed as "mergers" are really one of several types of acquisition. If a company buys another and absorbs its operations, it has completed an acquisition. The distinction is mostly technical, although calling the deal a merger shows deference to and respect for the other company's employees and former owners.

Horizontal mergers involve companies that offer the same products or services to the same kinds of customers. If your business mows lawns and you combine with another lawn-care company in your town, that's a horizontal merger example. Horizontal mergers offer "economies of scale," meaning that average costs decline as the company does a greater volume of business. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies: Where the original companies each needed their own purchasing department, advertising budget, benefits program and so on, the merged firm only requires one.

A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. Say you own a manufacturing company that makes items out of plastic. Merging with a company that makes raw plastics would be a vertical merger. Vertical mergers help prevent business disruptions; the manufacturing operation no longer has to worry about obtaining enough plastic, while the plastics operation gets a steady customer. Cost savings through eliminating redundant functions are also possible.

Concentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but don't offer them the same products or services. If you owned a catering company, for example, and you merged with a business that rents tables, chairs, event tents and party equipment, that would be a concentric merger. Both companies appeal to customers who have events to plan, but not in the same way.

Concentric mergers diversify the combined company's offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business, because the firm becomes more of a "one-stop shop" offering more of the services that both companies' customers are typically looking for.

Although not as common as they were during the 1960s and '70s, a fourth type of merger is the conglomerate merger. In this business move, two companies from different industries or geographic locations join forces. In a pure conglomerate merger, the companies are completely unrelated in their product offerings. In a mixed conglomerate merger, the companies are looking to expand their product offerings or market reach by joining with another company.

One of the advantages of these types of corporate combinations is that the new company now has the ability to reach a wider market by expanding its customer base. The combined company has access to all the customers familiar with products sold by the separate entities and can now market to everyone. However, these mergers are often difficult to pull off effectively as the two unlike entities must function together and adjust their operating processes, business models and corporate cultures.

When businesses acquire other businesses or operations that were previously competitors, suppliers, buyers, or sellers, they are engaging in a strategy known as integration. This strategy is based on the possibility of synergy, the idea that the sum of two entities will be greater than their individual parts—often expressed as 1+1=3. Integration can be accomplished in two primary ways: through mergers or acquisitions. A merger is the consolidation of two companies that, prior to the merger, were operating as independent entities. A merger usually creates one larger company, and one of the original companies ceases to exist. Mergers can be either horizontal or vertical.

A horizontal merger occurs between companies in the same industry. This type of merger is essentially a consolidation of two or more businesses that operate in the same market space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, since competition tends to be higher, and the synergies and potential market-share gains are much greater in those industries.

Facebook + Instagram = Horizontal Merger

When Facebook acquired Instagram in 2012 for a reported $1 billion, Facebook was looking to strengthen its position in the social-media and social-sharing space. Both Facebook and Instagram operated in the same industry and were in similar positions with regard to their photo-sharing services. Facebook clearly saw Instagram as an opportunity to grow its market share, increase its product line, reduce competition, and access new markets.

A vertical merger is characterized by the merger of two organizations that have a buyer-seller relationship or, more generally, two or more firms that are operating at different levels within an industry’s supply chain. Most often the logic behind the merger is to increase synergies by merging firms that would be more efficient operating as one.

Apple: The King of Vertical Integration

Apple Inc. is famous for perfecting the art of vertical integration. The company manufactures its custom A-series chips for its iPhones and iPads. It also manufactures its custom touch ID fingerprint sensor. Apple opened up a laboratory in Taiwan for the development of LCD and OLED screen technologies in 2015. It also paid $18.2 million for a 70,000-square-foot manufacturing facility in North San Jose in 2015. These investments (i.e., mergers) enable Apple to move along the supply chain in a backward integration, giving it flexibility and freedom in its manufacturing capabilities.

An acquisition, on the other hand, occurs when a company purchases the assets of another business (such as stock, property, plants, equipment) and usually permits the acquired company to continue operating as it did prior to the acquisition. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity.

Reasons for Mergers and Acquisitions

There are many good reasons for growing your business through an acquisition or merger. These include:

1. Obtaining quality staff or additional skills, knowledge of your industry or sector, and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.
2. Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity that can be bought at a small premium-to-net-asset value.
3. Your business is underperforming. For example, if you are struggling with regional or national growth, it may well be less expensive to buy an existing business than to expand internally.
4. Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.
5. Diversification of the products, services, and long-term prospects of your business. A target business may be able to offer you products or services that you can sell through your own distribution channels.
6. Reducing your costs and overheads through shared marketing budgets, increased purchasing power, and lower costs.
7. Reducing competition. Buying up new intellectual property, products, or services may be cheaper than developing these yourself.
8. Organic growth (i.e., the existing business plan for growth needs to be accelerated). Businesses in the same sector or location can combine resources to reduce costs, eliminate duplicated facilities or departments, and increase revenue.

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