With the evolving times, the demands of customers are also evolving. Therefore, companies are required to adopt different strategies to serve their customers better. In addition to customers’ requirements, several other factors affect the way companies operate. A merger is one of the methods adopted by companies to deal with changes in the marketing environment and demand of customers.
In this article, you will learn about what is mergers, the definition of the merger, different types of mergers and a few examples of mergers.
What is a Merger?
A merger is when two existing companies come together to form a new company. There are several reasons for which two companies merge to become one company. The most common reasons for merger is to lower the cost of production, innovation, expand the reach of the company, launch new products or services, explore new market segments, and to gain market shares, etc.
The two companies can merge when both companies are of the same size in the form of the number of customers, the size of the business, and the scale of operations, etc. However, the merger is different from the acquisition. In an acquisition, one company makes efforts to acquire the other company. Usually, companies of more substantial size buy smaller companies. On the other hand, the merger is a voluntary process of becoming one company of two companies of equal size.
The merger is not only beneficial for the companies, but it is also helpful for the shareholders. After the merger, the shares of the new company are distributed among the shareholders of the original companies. A special mutual fund is created to give benefit to the investors or shareholders of the original companies. In this way, the shareholders get a profit from the merger deal.
Definition of Merger
Types of Merger
The following are the different types of mergers that take place between two companies.
1. Congeneric Merger
The congeneric merger is the merger of two or more companies that are part of the same market and have various common factors such as marketing methods, technology, research and development processes, and production processes, etc. A congeneric merger is also referred to as a Product Extension Merger.
A merger is known as a product extension merger when a new product line of a company is added to the existing product line of another company. Companies can reach a more significant number of customers and can gain a bigger market share by merging to create one product extension.
This type of merger usually takes place between companies that are part of the same market but sells different kinds of products or services. The best example of the congeneric merger is the merger between a bank and an insurance company. A bank and an insurance company are two different entities that sell different but related products.
2. Conglomerate Merger
The conglomerate merger is a type of merger that takes place between two companies that deal in entirely different business activities or are part of entirely different industries. The companies can be operating in altogether different geographical regions and have nothing in common.
The conglomerate merger can be of two types, such as a pure conglomerate merger and mixed conglomerate. A pure conglomerate merger is a type of merger of two or more companies that don’t have anything in common. On the other hand, a mixed conglomerate merger is a type of merger in which two companies are involved in completely two different unrelated business activities but are trying to create product or market extensions through mergers.
A conglomerate merger takes place only when two companies don’t have any overlapping factors but comes together by keeping in mind the benefit of shareholders of the company. For example, luxury goods provider Louis Vuitton merged with Moet and Chandon.
Another example of a conglomerate merger is the merger between the Walt Disney Company and the American broadcasting company.
3. Market Extension
A market extension is a type of merger in which two companies that sell the same products but are part of different markets.
The companies that opt for market extension merger have attention to gain access over more significant market segments and to obtain more massive customer bases.
4. Vertical Merger
A vertical merger is a type of merger in which a merger takes place between two companies where one company provides parts and services for the production of the products of another company. That means a merger takes place between two companies that operate in the same industry but at different levels. For example, when a company merges with its suppliers of raw material to produce its products.
The reason behind the vertical merger is the reduction in the cost of production. The cost of production is one of the main costs of business. A company can control its expenses to a great extent by merging with its key suppliers. The best example of a vertical merger is the merger between Internet Provider America Online (AOL) and media conglomerate Time Warner.
5. Horizontal Merger
The horizontal merger is a type of merger that takes place between companies that are part of the same industry and are direct competitors of each other. In simple words, we can say that the horizontal merger takes place between two companies that offer similar products and services. The horizontal merger is not very common, but it usually takes place between companies that have a goal to create larger market shares and economies of scale as the competition between companies is higher when there are few companies in the market. The famous example of a horizontal merger is the merger between HP (Hewlett Packard) and Compaq. The merger between these two companies is one of the successful mergers in the market, and it became a global technology leader.
Examples of Merger
The following are the famous examples of the merger of all time. Let us learn about them one by one.
1. The merger of Vodafone and Mannesmann
The merger between Vodafone and Mannesmann is one of the largest mergers that took place in the year 2000. The merger was worth over 180 billion dollars. Vodafone became the largest mobile operator in the world by acquiring German company Mannesmann.
The merger between the two companies played a crucial role in the popularity of mobile phones. It is also one of the most expensive mergers between two companies as Vodafone had to pay a fortune to acquire the German company as most Germans were against the deal.
2. The merger between Exxon and Mobil
The big oil company became even more prominent when Exxon and Mobil companies came together to become ExxonMobil companies. Consequently, ExxonMobil company became the largest company in the world.