Merger is an agreement or a voluntary fusion whereby two existing entities that are equal in terms of size, scale of operations, customers, etc decides to amalgamate to form into a new entity with an agenda to expand its reach into newer markets, lower operational costs, increase revenues, earn greater control over market share, etc.
In simple words, it means an agreement in which two companies settle into an agreement to form a new third company or legal entity. In this, merged companies are usually of equal size and have a similar number of customers. On the other hand, in acquisition acquirer company is more significant as compared to an acquired company. A new legal entity is being created, while this is not the case in an acquisition.
It can be a cash or stock merger or both. In a cash deal, the acquiring company will pay the target group with cash for their stocks. In an all-stock deal, the acquiring company will offer stocks instead of cash to the target company.
Types of Mergers
#1 – Conglomerate
A conglomerateConglomerateA conglomerate is a company or corporation made up of different businesses that operate in various industries or sectors, often unrelated. It holds a stake in multiple smaller companies that choose to manage their business separately to avoid the risk of being in a single market, thus, taking advantage of diversification. is a type of merger, in which companies are not engaged in related business. It will involve companies which are having no business in common. Usually, these are done, keeping in mind shareholding values.
#2 – Congeneric
Here, the companies are in a similar market but having overlapping technologies. In this, one company can add its product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing. to another company line. With this, companies can get a larger number of customers, and they can benefit from the knowledge transfer of technologies.
#3 – Market Extension
Here, the companies sell similar products but are in different geography or areas. With a market extension, companies try to gain access to a larger market group.
#4 – Horizontal
In this Horizontal MergerHorizontal MergerHorizontal mergers take place when two companies in the same industry merge. Typically, industry competitors seek such mergers for a variety of reasons, including increasing market share, achieving economies of scale, lowering competition, and so on., the companies are in the same product line and a similar industry. It is processed can be a part of the consolidation process. It is a common type of merger between the companies, and the objective is to gain a larger market share, cost-cutting, and have economies of scale.
#5 – Vertical
When 2 companies are at a different level in a product line and are trying to merge them, it is known as a vertical mergerVertical MergerA vertical Merger is the combination of 2 or more business units operating at different production stages of the same supply chain for a common product or service. It often occurs between the product manufacturer & its raw material supplier. . For example, a tire manufacturing company is merging with an auto manufacturing company. It is mainly done to reduce inventory costs and have cost synergies in a merger.
Examples of Merger
Example #1 – Disney – Pixar Merger
The Disney-Pixar deal was announced on May 5, 2006. Disney made a separate subsidiary and acquired shares worth $7.4 billion of Pixar in an all-stock transaction. It is an example of a vertical merger.
Disney group is one of the largest media group in the world, while Pixar is an animation company which provides computer graphics for the movie. With this, Disney got the best technology of the best animation studios globally for its movies, while Pixar got the required capital to outdo its competitions. For this, Disney offered 2.3 shares of its stock to Pixar shareholders. That means by that price, Pixar shareholders receive a premium of 3.8%.
Example #2 – Exxon – Mobil Merger
Exxon Mobil deal was announced in 1998, and it was the largest till that time. The size of the agreement was $73.7 billion. Exxon was the largest energy company, while Mobil was the second-largest oil company in the whole US at that time.
With this, Exxon Mobil became the largest oil company and the third-largest company in the world. From this deal, Exxon shareholders owned 70% of the merged company, and Mobil shareholders were left with 30% shares of the new entity. Mobile shareholders received 1.32 Exxon shares for each Mobil shares. Mobil was valued $76 bn in this deal.
- Market Share: Let’s say 2 companies are in a similar market and are in competition. Instead of having lost out to a third company, they can decide to merge the 2 companies and gain a larger market share.
- Reduced Cost of Operations: Another advantage is that the size of a merged company gets bigger compared to individual companies. So, because of the economy of scale, the total cost of operation can be reduced.
- Revenue and Profit Growth: The companies may want to achieve the objective of revenue and subsequently, profit growth.
- Expanding Operating to New Geographies: It’s hard for a company to directly go and get established in the new market or geographies. That’s why it can target to merge similar companies in that area and get the business started.
- A bigger company can become a monopoly in the market, and then it can increase the prices of is goods/suppliers, which is not good for the consumer.
- It could be tough to communicate and coordinate between the employees of different cultures.
- Since shareholders of merged companies want a premium on their shares for a merger to go through, hence it could be a very costly affair.
A merger could be a vital part of any business strategies such as an increase in market share or reducing the costs. With the evolving market, it is crucial for a business to keep innovating either by the organic or inorganic way. For inorganic growth, if a business carefully merges a business that can complement its strategy and execute it perfectly, then this marriage could ripe sweet fruit for them.
This article has been a Guide to what is a Merger and its definition. Here we discuss Top 5 types of mergers along with examples, advantages, and disadvantages. You can learn more about M&A from the following articles –