types of mergers

7/28/2019 Types of Mergers

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Types of MergersFrom the per spect ive of bus iness s t ruc tures , there i s a whole hos t of d i f f erentmergers .Here are a few types, distin guishe d by the relat ionship between the two companies that are merging:a. Horizontal merger- Two companies that are in direct competition andshares i m i l a r p r o d u c t l i n e s a n d m a r k e t s , j o i n t o g e t h e r i t i s k n o w n a s a h o r i z o n

t a l merger. The idea behind this type of merger is to avoid competition between theunits. (e.g.:

two manufacturers of same type of cloth, two transport compan ieso pe ra t in g on t h e s ameroute - the m erger in a l l these cases wi l l be hor izo nta l merger.b. Vertical merger- A customer and company or a supplier and company. (e.g.:an ice cream maker merges with thedai ry farm tha t t hey p reviously purchased milk from; now, the milk is 'free')c. Market-extension merger- Two companies that sel l the same products indifferent markets (e.g.: an ice cream makerin the United States merges with anice cream maker in Canada)d. Product-extension merger - Two compan i es s e l l i ng d i f f e r en t bu t r e l a t ed p r oduc t s i n t he s ame mar ke t ( e .g a cone

suppl ier merging wi th an ice creammaker) .e. Conglomeration- Two companies that have no common business areas wheretwo me rg in g fi rm s ar e in th e

s ame gener a l i ndus t r y , bu t t hey have no mut ua l buyer/customer or supplierrelationship, such as a merger between a bank and aleasing company. Example:

Prudential's acquisition of Bache & Company.


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Distinction between Mergers and

AcquisitionsAlthough they are often uttered in the same breath and used as though they

weresynonymous, the terms merger and acquis i t ion mean s l ight ly differentth in gs .When one company takes over another and clearly established itself as the

newowner, the purchase is called an acquisition. From a legal point of view,thetargetcompanyceases to exist, the buyer "swallows" the business and the buyer's

stock continues to be traded. In the pure sense of the term, a merger happens whentwofirms, often of about the same size, agree to go forward as a single new

companyrather th an remain separatel y owned and operated. This kind o f act ion i s

mo re p r e c i s e l y r e f e r r e d t o a s a " m e r g e r o f e q u a l s . " B o t h c o m p a n i e s 's t o c k s a r e surrendered and new company stock is issued in its place.Regardless of their

category or structure, all mergers and acquisitions have onecom mo n go al : th ey ar eal l meant to create synergy that makes the value of thecombined companies

greater than the sum of the two parts. The success of amerger or acquisition

depends on whether this synergy is achieved.10
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Economics/Reasons of mergersA number of

m er g er s, ta k e- ov er s a n d c on s ol i da t io n h a ve ta k e p l ac e i n t h e r ec e nt t i m e s . T h e m a j o r r e a s o n c i t e d , f o r s u c h m e r g e r s , i s t h el i b e r a l i z a t i on of econom y. Lib erali zati on is f orci ng comp anie s to en ter n ew bus ines s, ex it from others, and consolidate in some simultaneously.

The following are theother important reasons for mergers or amalgamations:Economies of scale. An amalgamation company will have more reasons at itscom man d t ha t the in div idu al com pan ies . Thi s wil l hel p in in cre asi ng

the scaleo f o p e r a t i o n s a n d t h e e c o n o m i e s o f l a r g e s c a l e w i l l b e a v a i l a b l e . T h e s e e c o no mi e s w i ll o cc u r

b e c a u s e o f m o r e i n t e n s i v e u t i l i z a t i o n o f p r o d u c t i o n fa ci l i t ies , d ist ri bu tion ne two rk , re sea rc h an d de ve lo pm en t fa cil i t ies ,e tc . t he se e c o n o m i e s w i l l b e a v a i l a b l e i n h o r i z o n t a l m e r g e r s w e r e s c o p e o f m o r e intensive use of resources is greater.Operating economies. A number of operating economies will be availed withthe mer ger of two or mor e com pan ies . Dup lic at ing fac ili ti es ina cc ou nt in g, p u r c h a s i n g , m a r k e t i n g , e t c . w i l l b e e l i m i n a t e d . O p e r a t i n g i n e f f i c i e n c i e s o f s m a ll c on ce rn s w il l b e c on tr ol le d

by the su pe ri or man ag eme nt eme rgi ng f ro mt he am al ga ma tion . Th e ama lg ama ted com pa ny wi l l be in a be tter po si t ion to operate than the

amalgamating companies individually.Synergy: Sy ne rg y r e fe r s t o t h e g re a te r c om bi n ed va l ue of me r ge d f ir m s t h an t h e s u m o f t h e v a l u e s o f i n d i v i d u a l u n i t s . I t i s s o m e t h i n g

l i k e o n e p l u s o n e m o re t ha n tw o. I t re su l ts f ro m be n ef i ts o th e r t h an t ho se r el a te d to e co no m ie s o f s c a l e . O p e r a t i n g e c o n o m i e s a r eo n e o f t h e v a r i o u s s y n e r g y b e n e f i t s o f


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merger or consolidation. The other instances which may result into

synergy b e n e f i t s i n c l u d e s , s t r o n g R & D f a c i l i t i e s o f o n e f i r m m e r g e d w i t h b e t te r o r g a n iz e d f a c i l i ti e s o f a n o t h e r u n i t, e n h a n c e d m a n a g e ri a l c a p a b i li t i e s, t h e s u b s t a n

t i a l f i n a n c i a l r e s o u r c e s o f o n e b e i n g c o m b i n e d w i t h p r o f i t a b l e i n v e s t m e n t

opportunities of the other.Growth: A company may not grow rapidly throw internal expansion. Merger or amalgamation enables

satisfactory and balanced growth of a company. Itcan cross many stages of growth at one time

through amalgamation. Growththrough merger or amalgamation is also cheape r and less risky. Anumber of costs and risk of expansion and taking on a new product line are avoided bythe

acquaint of a going concern. By acquiring other companies a desired level of growth can be

maintained by an enterprise.Diversification: T w o o r m o r e c o m p a n i e s o p e r a t i n g i n d i f f e r e n t l i n e s c a n d iversifytheir activities through amalgamation. Since different companies

area l r e a d y d e a l i n g i n t h e i r r e s p e c t i v e l i n e s t h e r e w i l l b e l e s s r i

s k i n diversification. When a company tries to enter new lines of activities then itma y f ac e a

number of problems in production, marketing etc. where someconcerns are already operatingin different lines, they must have crossed manyobs tac les and di fficult ies. Amalgamation wil l

br ing to geth er the exper ien ce of di ff eren t per sons in var ious act ivi ti es . So amal gamat ion wi ll bethe best wayof diversification.Utilization of tax shield : When a company with accumulate losses mergeswi th a pr ofi t ma kin g co mp an y i t is ab le

to utilize tax shields. A companyhaving losses will not be able to setoff losses against futureprofi ts , because it i s no t a p ro f i t maki n g u n i t . On th e o t h e r ha nd i f i t m erges wi t h a

concern15


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making profits then the accumulated losses of one unit will be set off againstthe future profits of t heother unit. In this way the merger or amalgamationwill enable the concern to avail tax benefits. Increase in value: one of the main reasons of merger or amalgamation is theincreaser in value of the merged c ompany.

The value of merged company is greater than the sum of the independent values of the merged company.Elimination of competition: the merger or amalgamation of two or morecompanies will eliminate competition among them.The companies will beable to save their advertisement expenses thus enabli ng them to reducetheir prices . The consumers wil l also benefit in t he form o f cheap or goods being available to them.Better financial planning

: the merged companies will be able to plan their r esources in a better way. The collective finances of

merged companies will be more and their utilization may be better than in the separate concerns. It ma yha ppe n tha t one o f t he me rg ing c ompa n ie s ha s shor t ge s t a t i on pe r iodwhi l e t he o the r ha s t hel o n g e r g e s t a t i o n p e r i o d . T h e p r o f i t s o f t h e c o m p a n y w i t h s h o r t g e s t a ti o n p e r i o d w i l l b eu t i l i z ed t o f i n a nc e t h e o t h er c o mpa n y . When the company with the longer gestation period starts eating profitsthen itwill improve financial position as a whole.Economic necessity: It may force the merger of some units. If there are twosi ck un it s, go ver nm en t ma y fo rc e t he ir

me rg er to im pr ov e th ei r fi na nc ia l position and over all working .a sick unit may be required tomerge withtheh e a l t h y u n i t t o i n s u r e b e t t e r u t i l i z a t i o n o f r e s o u r c e s , i m p r o v e a n d b e t t e r manage

ment . Rehabili tat ion of sic k un its is asocial necessi ty beca use thei r closure may result in UN employment etc.


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types of mergers

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