Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
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- Investment Banking Firms (27+)
- Top Banks (42+)
- Cryptocurrency Basics (10+)
A merger simply 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 bigger in nature 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 merger 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, acquiring company will offer stocks instead of cash to the target company.
Types of Mergers
#1 – Conglomerate
A conglomerate is a type of merger, in which companies are not engaged in related business. This will involve companies which are having no business in common. Usually, these are done keeping in mind shareholding values.
#2 – Congeneric
In this type of merger, companies are in a similar market but having overlapping technologies. In this, one company can add its product line 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
In this type of merger, 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 Merger, the companies are in the same product line and in a similar industry. It is processed can be a part of the consolidation process. This is a common type of merger between the companies and the objective is to gain 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, then it is known as a vertical merger. For example, a tire manufacturing company is merging with an auto manufacturing company. It is mainly done to reduce inventory cost and have cost synergies in merger.
Examples of Merger
Example #1 – Disney – Pixar Merger
Disney-Pixar merger was announced on May 5, 2006. In this, Disney made a separate subsidiary and acquired shares worth $7.4 billion of Pixar in an all-stock transaction. This 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 best animation studios in the world 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 merger was announced in 1998, and it was the largest till that time. 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.
Advantages of Merger
Companies follow the merger process because of the following advantages:
- 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 larger market share.
- Reduced Cost of Operations: Another advantage of a merger, 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 company in that area and get the business started.
Disadvantages of Merger
- A bigger company can become a monopoly in the market and then it can increase the prices of is goods/ supplier which is not good for the consumer.
- Another disadvantage of a merger 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.
Merger could be a very important part of any business strategies such as an increase in market share or reducing the costs. With the evolving market, it is very important for a business to keep innovating either by the organic or inorganic way. For inorganic growth, if a business carefully merges a business which can complement its strategy and execute it perfectly then this marriage could ripe sweet fruit for them.
This 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 –