The Most Common Types Of Corporate Mergers And Acquisitions
Small businesses often undertake in mergers and acquisitions for similar reasons as large corporations do – to strengthen their position in one or multiple markets, have access to new markets, boost operation efficiency or merely diversify their offerings. A merger is one common business exit strategy in addition to being a critical growth tool. But what comes into your mind when the terms mergers and acquisitions are mentioned? Just as there exist numerous business structures to take into account when planning to launch a new business, there are multiple merger structures based mainly on differences in economic function, the purpose of the business transaction, and the relationship between the companies involved.
The structure and scale of your business in addition to the services and products you produce as well as several other factors imply that not all merger and acquisition types are ideal for your company. All the same, it is still essential to understand the various types of mergers and acquisitions taking place in the modern-day business world and their impact on the merging firms and competitors at large. Here are the most common mergers.
For a long time, the term “conglomerate’ has been misused to refer to a large business or company. However, a conglomerate is precisely the coming together of companies that undertake unrelated business activities or in entirely separate geographical locations. A conglomerate merger can be further grouped into pure and mixed conglomerates.
A pure conglomerate usually involves two firms which have nothing in common. On the other hand, a mixed conglomerate occurs between companies that, although they engage in unrelated business activities, are making strides towards gaining market or product extensions through this merger. When firms come together in this type of business merger, both markets will continue to battle similar competitors as the encountered before the merger.
There are several accepted benefits of conglomerate mergers, and they include, a reduction in investment risk because of diversification as well as better economies of scale. On the flip side, some demerits of this kind of merger are that accounting activities become complex and this makes it easier for the managers to hide some company information and more difficult for auditors and analysts to unearth the issues. Another considerable risk associated with this type of merger is the instant shift in business operations as a result of the merger since the two organizations offer unrelated services or products or operate in entirely different markets.
Contrary to a conglomerate merger, a horizontal merger usually takes place between companies that are in the same industry. The companies or organization performing the merger are often competitors or parties offering similar services or products. And as anyone would guess, horizontal business mergers are common in the industries where there are fewer overall companies because competition is usually sharper and the potential for gaining a larger share of the market is much greater.
Horizontal mergers offer significant economies of scale meaning that the average costs will decline because the new company will now do a greater volume of business. This type of merger also increases the market share since customers who were loyal to both companies will now come together to one company. Better yet, this kind of merger offers the opportunity for cost saving because it eliminates redundancies in this sense; where the two original firms each required their own procurement department, advertising budget, and benefits program, the merged company will only need one.
A vertical merger refers to the coming together of two companies which are involved in the production of similar services or products but are both at different production stages. This type of merger often occurs when organizations operating in different niches within an industry’s chain combine their operations.
One common advantage of this kind of merger is that it increases efficiency and synergy. On the flip side, this kind of merger could raise concerns regarding anti-competitiveness. For instance, if an organization was to buy one of the supply companies supplying parts to itself and its competitors, it could minimize its costs tremendously compared to the costs of the competitors. The underlying rationale behind this type of merger is better flow of information through the supply chain and higher quality control.
Market Extension Merger
This type of merger usually occurs between two organizations which deal with the same products but operating in separate markets. This merger aims to gain better access to a broader market and consequently a larger client base. While such a merger could be beneficial to a business, it is crucial that the appropriate business partner is identified if you are looking to take part in a market extension merger. When a larger national company merges with a local company, there could be a clash in business cultures, and this could have a negative impact of the new company’s success. Besides, whatever made one of the companies successful in the first instance could end up being diluted after the formation of a single organization.
Product Extension Merger
Although quite similar to a market extension merger, the two have a clear-cut difference. In this case, the merger takes place between business organizations dealing in related products in the same market. One of the most referred to example of this type of merger is when Broadcom acquired Mobilink Telecom Inc. The former deals with the manufacture of Bluetooth personal area network chips and systems for wireless LAN while the latter creates product designs that are meant for use in handsets which are equipped with Mobil Communications technology. In this case, both products complement each other.
By undertaking this merger, the newly merged company is now able to group their products together and have access to a larger customer base. It is crucial to note that in this case, the services and products of the two companies are dissimilar although they are related. The key, in this case, is to make use of similar distribution channels, related or common supply chains or production processions.