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Types of Mergers

Types of Mergers

We are going to discuss the Mergers. A merger is an agreement or contract between two parties in which they join each other to make one company, with an aim to perform better, share the costs, increase the profits, face the challenges or any corporate benefits. There are major 5 different types of mergers. These different types of mergers are also referred to as, “Business Combinations”. These types are:

  • Conglomerate Merger
  • Horizontal Merger
  • Market Extension Merger
  • Vertical Merger
  • Product Extension Merger  

In this article, we will throw the light on all the major 5 types of Mergers or Business combinations. While defining the Mergers, let us tell you that, Mergers are from positive subjects and intentions. We are assuming that there is no negative intention while forming mergers.

First Merger = Conglomerate Merger

It is a type of merger where the merger is for “Unrelated Business Activities”. Unrelated business activities are business activity or trade activity that is done on a regular and consistent basis and the purpose is not for the tax exemption. This merger is further divided into two types of mergers; Pure Conglomerate and Mixed Conglomerate.

Types of Mergers

Pure Conglomerate: When two different companies have nothing in common.

Mixed Conglomerate: A type of Conglomerate involves market or product extension.

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Example::

An apparel company merges with a Tea Company. Apparel companies will have to face the same competition in both companies in their respective market. Apparel companies will have to face the same competition level they were having before or facing before, even the Tea Company.

Second Merger = Horizontal Merger

When both companies belong to the same industry. Like two companies working in Entertainment Industry, Food Industry, Hospitality Industry, Beverages Industry etc. It’s the most common kind of merger because companies prefer to merge with the company they have already experienced with. Companies have already relevant experience and exposure to dealing with such companies belonging to the same industry.

Example::

A merger between Two Sports Companies. A merger between two Hotels. A merger between two restaurants. A merger between two consultancy services for the same kind of projects or clients.

Third Merger = Market Extension Mergers

It is a little like Horizontal Mergers but with a difference. In this merger or business combination type, any two companies form a merger for the same/common product but for the different markets. The question is what will be the benefit if the markets are not common?

The answer to this question is that both companies get the opportunity to market more than one market and bigger markets. This way both companies can increase their revenue by targeting more than one market and much bigger markets.     

Example::

When a Company XYZ who is into Banking Business merges with another bank in another country. Then Company XYZ gets the opportunity to get access to a new market.

Forth Merger = Vertical Merger

It’s a merger where two companies produce or manufacture different goods for one certain completed product. Vertical Merger comes into existence, when firms, working on different levels, but within the same industry, form a merger. These are good because such mergers improve operational efficiency.

Example::

Two different firms form a merger that cannot compete with each other. For example, a Motor Cycle Company forms a merger with a company that makes the spare parts.

Fifth Merger = Product Extension Merger

A product Extension Merger is a merger where two different types of companies work in the same market but both of them offer different services or products. Its alternative name is Congeneric Merger. These mergers are formed to add new services or products usually. It also helps to reduce the cost.

Example::

The best example of a Product Extension Merger is “Pizza Hut and PepsiCo in 1977 Merger”. Read this Case Here.

READ ABOUT: Mergers and Acquisitions

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