What is a merger?
A merger is an arrangement that combines two existing businesses into a single legal entity. The companies that agree to combine are often the same in terms of size and scope of operations.
A merger is a common strategy that companies use to penetrate new markets or gain market share to boost shareholder value.
Advantages of a merger
When two firms form a merger, the resulting new entity gains a larger market share and a competitive advantage.
A merger also reduces operational costs, where companies can purchase bulk orders of raw materials that result in cost reductions.
Further, businesses that produce similar products can merge to prevent duplication and remove competitors, lowering consumer costs.
Mergers also prevent businesses from going bankrupt and also save the jobs of the employees.
Types of mergers
Here are the five types of mergers:
To eliminate competition in the industry, companies that operate in the same industry form a horizontal merger.
Creating a larger business with a greater market share is the goal of a horizontal merger to better equip the companies against the increasing competition.
When a company merges with another company in the same supply chain, the union is referred to as a vertical merger.
This form of the merger is carried out to maximize synergies, realized through cost reductions as a consequence of a merger with one or more supply firms.
Improved quality control and information flow across the supply chain are among the reasons for a vertical merger.
Market extension merger
A market extension merger is formed when two companies with identical offerings but different markets join forces to gain access to each other’s market.
The main goal of this type of merger is to get access to a broader market and a larger client base.
This merger is done between businesses that offer different but related goods or services in the same market. It allows the combined companies to group its goods together and get access to a larger market.
When companies merge but do not have anything in common when it comes to business operations, it is a conglomerate merger.
Entrepreneurs can only merge if it makes sense from the standpoint of shareholder wealth; that is, if the companies can gain a stronger benefit, such as increased value, performance, or cost savings.
Since the two companies operate in completely separate markets and offer unrelated products or services, the greatest risk in a conglomerate merger is the immediate shift in company operations.