At some point or another, you may want to join forces with another business to help boost profits or cut costs. One way to do this is to merge your business with another company through a merger. There are a variety of mergers to choose from. Are you ready to explore the different types of mergers? If so, then keep reading. Show What is a merger?First things first, what exactly is a merger? A merger is an agreement where two companies join together to form one new company. In short, a merger is the combination of two companies into a single legal entity. With a merger, both companies have to voluntarily merge with each other. There are a number of reasons why businesses decide to merge. Businesses might decide to merge to:
Some companies use a merger as a business exit strategy. Other companies may use a merger for business restructuring. Businesses that merge are typically similar in terms of size, customer count, and scale of operations. After a merger occurs, shares of the newly-merged company are distributed to existing shareholders of both businesses. Mergers vs. acquisitionsIf you’re familiar with the term merger, then you’ve probably seen or heard it along with the word “acquisition.” Although they are often used interchangeably, mergers and acquisitions are not the same thing. An acquisition is when one company takes over another entity and becomes the new owner of said entity. With an acquisition, one company purchases most or all of another company’s shares and gains control of the other company. As you read above, a merger is when two companies join forces and become one. With mergers, two companies team up together, and one business does not acquire the other one. 5 Types of mergersThere are a few different types of company mergers to choose from. The most common types of mergers are:
Ready to explore all of the merger options businesses can choose from? Check out how they compare below.  HorizontalA horizontal merger is a merger between two companies in the same industry. This type of merger involves two businesses that offer the same products or services to the same kinds of customers. With a horizontal merger, the two businesses are direct competitors of one another. The goal of a horizontal merger is to increase reach and market share by coming together as one company. For example, say you own a bakery and decide to merge with another bakery in town. You would be merging with a direct competitor and would be fusing together to form one bakery. Horizontal mergers are more common in industries with fewer companies because competition tends to be higher. VerticalA vertical merger occurs when two companies that are in the same industry but at different points in the supply chain merge operations. Companies in a vertical merger produce different products or services along the supply chain and work toward producing one final product. Vertical mergers are typically done to reduce costs, improve logistics, and improve operating efficiency. An example of a vertical merger would be an auto parts industry merging with a company that supplies raw materials for auto parts. ConcentricA concentric, or congeneric or product-extension, merger is when two companies merge that are in the same market but sell different, yet related products or services. This type of merger allows the companies to group together their products or services and access a larger set of consumers. With a concentric merger, a company merges with another company that sells products or services to the same customers. Because they sell different products, they are indirect competitors. These types of mergers tend to drive new business because they become a one-stop shop for customers. By offering more of the products or services both businesses’ customers are looking for, they can attract more consumers. An example of a concentric merger would be if a catering company merged with a party planning company. They are both in the same industry, have different offerings, and have related products or services. ConglomerateA conglomerate merger occurs when two or more companies in different industries or geographic locations come together to broaden their range of services and products. With a conglomerate merger, the companies involved engage in completely unrelated business activities. For example, one may be a software company and the other may be a clothing business. There are two types of conglomerate mergers:
A business may take part in a conglomerate merger to reach a wider market and expand its customer base. Market-extensionA market-extension merger is a merger between companies in different markets that sell similar things. With this type of merger, companies sell the same or similar products or service but compete in different markets. Companies that choose the market-extension merger route are typically looking to gain access to a bigger market and client base. Comparing the types of business mergers: ChartWant to skim over the different types of mergers? Check out our handy chart to quickly find out the differences between each type of merger.
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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 two businesses in the same type of business merge together it is known as a vertical merger?
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