Hey there! Welcome back again. In the previous blog, we discussed what are mergers and acquisitions. In this blog, we will be covering the types of mergers. Did you know that the term chosen to describe a merger may depend on the economic function, the purpose behind the business transaction, and the relationship among the merging companies? Let us now see the various types of mergers.
The types of mergers are namely
- Horizontal mergers
- Vertical mergers
- Conglomerate mergers
- Market Extension mergers
- Product or Congeneric Extension mergers
- Accretive mergers
- Horizontal Merger:
- Horizontal merger is one type of merger that operates between two or more companies that are offering similar products or services.
- These organizations usually work within the same space or industry. Such mergers are more common in industries that have fewer enterprises offering the same product.
- Let us understand better with the help of an example, a merger between Coca-Cola and Pepsi would be horizontal. The nature of the business operations can be very similar.
- Plenty of opportunities can be availed by pooling the resources that help in increasing the manufacturing of units and reducing the costs.
- Vertical Merger:
- Vertical merger is another common type of merger. Vertical mergers are simple but very common.
- The main reason behind such mergers is to increase the synergies that are created by merging firms that would result in being more efficient by operating as one.
- To summarize, in simple words, a vertical merger joins two companies that may not be direct competitors but exist under the same supply chain.
- A classic example that can be given would be eBay and PayPal. As we all know, eBay is an online shopping and auction platform, whereas PayPal provides services to ease the transfer of money, enabling users to make online payments.
- Though the services offered by both are quite different, a merger helped eBay in increasing the number of transactions which indeed proved to be a great strategic decision overall.
- Conglomerate Merger:
- Conglomerate merger is a type of merger that is involved in totally unrelated business activities.
- Did you know that conglomerate mergers are also of two types? Yes, they are known as pure and mixed.
- Pure conglomerate merger refers to those mergers that have nothing in common. Mixed mergers refer to those mergers that are either looking for product extensions or market extensions.
- One such example of a conglomerate merger would be of Walt Disney Company and the American Broadcasting company.
- Other recent examples of conglomerate mergers include Amazon and whole foods, Disney and Pixar, etc.
- Market Extension Merger:
- A market extension merger operates between two companies, where one company wants to penetrate a new or unknown market by merging with another organization that offers the same product or service, having an established market share.
- In other words, a market extension merger takes place between two companies that deal with the same products but in separate markets.
- Such mergers are carried out to increase market share and client base. One historic example of a market extension merger is that of Pizza Hut by Pepsi Co.
- Pepsi observed and very clearly understood that people went to Pizza Hut, and hence the idea to merge with them. This helped Pepsi in reaching a wider market.
- This merger took place long back in 1977, and within a year, sales nearly went up to $436 million, helping pizza hut to open a new headquarter, which is valued at $10 million.
- Product or Congeneric Extension Merger:
- Product extension mergers operate between two or more companies that deal with related products, present in the same market, but do not have a competitive supplier or customer relationship.
- Product extension merger enables merging companies to group their products, share expertise, technology, designs, as well as gain access to a much bigger set of customers. In turn, this helps in acquiring the required potential to lead to much higher profits.
- The example of Pizza Hut and Pepsi that was discussed at the above point can also be considered here.
- Accretive Merger:
- When one company acquires another company and the transaction increases the first company’s earnings per share, the deal is called an accretive merger.
- Such a merger focuses on addressing and combining the different cultures. A way to calculate this is to note the price-earnings ratio (the ratio between the company’s price per share compared to its per-share earnings per year) between the acquiring firm and the targeted firm.
- On the other hand, when one company acquires another company, and the transaction decreases the previous company’s earnings per share, then the deal is called a dilutive merger.
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