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There are a few types of business combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger, product extension merger and forward merger. The term chosen to describe the merger depends on the economic function, purpose of the business transaction and relationship between the merging companies. Also, we have read about the risks associated M&A transactions in the previous article.

Types of mergers

Conglomerate merger

A merger between firms that are involved in totally unrelated business activities. There are 2 types of conglomerate mergers: pure and mixed. In this case, the business of the target company is entirely different from that of the acquiring company. For e.g., a watch manufacturer acquiring a cement manufacturer, a steel manufacturer acquiring a software company etc. The main objective of a conglomerate merger is to expand the size of the company.

Pure conglomerate mergers involve firms with nothing in common. Mixed mergers involve firms that are looking for product extensions or market extensions.

Example

Walt Disney Company and the American Broadcasting Company.

Horizontal Merger

It occurs between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space. They often are competitors offering the same service or product. Such mergers are common in industries with less competition. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies’ business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

Example

Coca-Cola and the Pepsi beverage division.
Times Bank with HDFC Bank, Bank of Madura by ICICI Bank, Nedungadi Bank by Punjab National Bank

m&A USA

Market Extension Mergers

A market extension merger takes place between two companies that deal in the same products but in different markets. Moreover, the main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base. Thus, this merger enables the acquiring company to utilise the synergy of the acquired company.

Example

Eagle Bancshares Inc and the RBC Centura were merged. Eagle Bancshares is headquartered at Atlanta and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. Also, one of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market.

Thus, RBC got a chance to deal in the financial market of Atlanta , which is among the leading upcoming financial markets in the USA.

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Product Extension Mergers

A product extension merger takes place between two business organizations that deal in similar products and operate in the same market. Also, the product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

Example

Mobilink Telecom Inc. and Broadcom  Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs. The  handsets have Global System for Mobile Communications technology.

It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. The merger will complement the wireless products of Broadcom.

Vertical Merger

A merger between two companies producing different goods or services for one specific finished product. Thus, a vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. Moreover, vertical merger can happen in two ways. One is when a firm acquires another firm which produces raw materials used by it.
Another form of vertical merger happens when a firm acquires another firm which would help it get closer to the customer.

Example

When two companies that may not compete with each other, but exist in the same supply chain join, it is a vertical merger. Automobile company joining with a parts supplier. It would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. They would guarantee the parts division, in turn, with a steady stream of business.

Forward merger

In a forward merger, the target merges into the buyer.

Example

ICICI Bank and Bank of Madura merger

 

You may refer to this Forbes article on Mergers and Acquisitions for more insights!

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