Explain Merger and its types

With change in market environments and evolving needs of customers, companies need to change their strategies and their dimensions to sustain and increase their market share.

Merger is nothing but, when two companies combine to form a new company due to several reasons. The main motive is to expand their arms, explore new markets, increase their market share, decrease operational cost, etc.

Terms used in merger are Acquiring Company and acquired company. Mergers can be done either by cash or by stock.

In a cash merger, the acquiring company will pay in cash for the acquired company stocks.

In a stock merger, the acquiring company will offer stocks for the acquired company.

Mergers take place for the following reasons −

  • Low tax liability.
  • Eliminate/ decrease competitions.
  • Strengthen financial resources.
  • Explore new geographical areas.
  • Increase profits.

Types of mergers

The types of mergers are explained below −

Vertical merger

  • Companies in the same industry, but they are in different product lines.
  • Example − Merger of Walt Disney and Pixar, wherein, Walt Disney was in the media and entertainment line and Pixar was an animation studio.

Horizontal merger

  • Companies in the same industry and same product line.
  • Example − merger of Vodafone and Idea, wherein, both the companies are in telecommunications.

Conglomerate merger

  • Merger between two companies having different business.
  • Example − Larsen & Toubro Ltd., wherein the company is into manufacturing goods, financial services, engineering, construction, information technology etc.

Market extension merger

  • Merger companies of the same product in different areas/markets.
  • Example − Eagle Bancshares Inc by RBC centura.

Congeneric merger

  • Merger between companies in the same product line and by merger, they will add new products in the market.
  • Example − Merger of Citicorp and travelers group, wherein, Citicorp is in banking and credit card services, while, travelers group in insurance and brokerage services.