What Is a Merger?
Also known as a buyout, a merger refers to two companies (typically the same size) who willingly join together to create a single entity. Through a merger strategy, one “survival company” continues to exist after a buyout is completed.
Mergers vs. M&A
Mergers and acquisitions (M&A) cover any combination of companies joining forces. While a merger is a combined agreement of two similar companies working together, an acquisition occurs when one company buys – and thus takes over – another’s assets.
Mergers vs. Joint Ventures
When companies merge, they liquidate their existing sole entities and fuse together in joint ownership (whether through incorporation or another legal structure).
A joint venture (also referred to as a merger for diversification) occurs when two separate entities combine to create a business that is separate from their existing entities. If the new venture doesn’t affect it, the existing entities may stay in business.
Are Consolidations and Mergers the Same?
Mergers and consolidations are not the same. Mergers combine two companies into one surviving company. Consolidations combine several companies into a new, larger organization. For instance, if Company ABC and Company XYC were to consolidate, they might create Company MNO.
What Types of Mergers Are There?
There are four types of mergers and each has its own advantages, disadvantages, and requirements:
1. Horizontal Mergers
Companies selling the same type of products with low market shares often merge to gain a larger market share and economies of scale. Each company’s costs will decrease as they join forces and share resources.
Horizontal Merger Example
Because they both sell the same types of products with a similar client base, a Pepsi and Coke merger would be considered a horizontal merger strategy.
2. Vertical Mergers
A vertical merger occurs when two companies attempting to produce the same product join together to create a more effective business flow. They are usually at different stages of the production process, but each plays an equal role in creating the end product.
Vertical Merger Example
The merger of eBay and PayPal was a vertical merger. eBay wanted better control of their sales, and merging with PayPal created a more streamlined payment process, increasing the profits of both companies.
3. Concentric Mergers
Two companies serving the same customers (but with different products) create a concentric merger. These companies combine to create a larger product offering for one business, thus enabling both companies to take advantage of a larger market share.
Concentric Merger Example
If a cell phone company merged with a cell phone case company, it would be considered a concentric merger. They sell to the same customers (cell phone users) but each sells different products. Merging makes them a ‘one-stop shop,’ increasing sales and the market share.
4. Conglomerate Mergers
Conglomerate mergers occur when two companies serving different markets and/or geographic locations join together. The companies may be unrelated (a pure conglomerate merger) or related either vertically or horizontally (mixed conglomerate).
Concentric Merger Example
Amazon buying Whole Foods is an example of a conglomerate merger. Before the purchase, Amazon wasn’t a significant grocery industry player but quickly became a full-fledged grocery provider (in addition to its books, electronics, and other goods).
Common Mergers & Acquisitions Results
If a company completes a merger or acquisition, it should hope for the following:
Increased Market Share
The higher market share gives companies a leg up on the competition.
Companies can reduce or eliminate duplicate resources. They also experience economies of scale, buying in bulk versus smaller quantities leading to more savings.
Many merged businesses tap into new markets, especially new geographic markets, which increases sales.
Saved Jobs and/or Money
Merging companies prevent the closure or bankruptcy of one firm, which saves jobs and major financial losses for company executives.
Are All Merger Agreements Public?
Public companies must disclose merger agreements to the Securities and Exchange Commission (SEC) within four days of entering the agreement.
The Most Common Reasons That Mergers Fail
Mergers can fail for many reasons, including:
Lack of owner involvement in the decision
Merger without shareholder approval
Lack of necessary resources
Spontaneous economic factors