What is Mergers? and types of Mergers

Meaning of mergers

A merger is a combination of two companies into one larger company. This action involves stock swap or cash payment to the target. In a merger,the acquiring company takes over the assets and liabilities of the merged company. All the combining companies are dissolved and only the new entity continues to operate. In general,when the combination involves firms that are of similar size, the term,consolidation,is applied. When the two firms differ significantly by size,the term merger is used.

Merger commonly takes two forms:

  1. Amalgamation: In this form two entities combine together and form a new entity,extinguishing both the existing entities.
  2. Absorption: In this form one entity gets absorbed into another. The latter does not lose its entity. Thus, in any type of merger,atleast one entity loses its entity.

Hence,

A+B=A Where company B is merged into company A (Absorption)

A+B=C Where C is an entirely new company (Amalgamation or Consolidation)

Types of Mergers

types of mergers

1. Horizontal Merger

When two or more concerns dealing in same product or service join together, it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units.

Ex: Two manufacturers of same type of cloth, two book sellers and two transport companies operating on the same route- the ,merger in all these cases will be horizontal merger.

2. Vertical Merger

Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment.

Ex: Merger of Reliance Petroleum Ltd. With Reliance Industries Ltd.

3. Conglomerate Merger

When two concerns dealing in totally different activities join hands, it will be a case of conglomerate merger. The meaning concerns are neither horizontally nor vertically related to each other.

EX: A manufacturing company may merge with an insurance company; a textile company may merge with a vegetable oil mill.

Types of Conglomerate Mergers

  1. Product Extension Merger
  2. Market Extension Merger
  3. Pure Merger

4. Congeneric Merger

It occurs where two merging firms are in the same general industry, but they have no mutual buyers/customers or supplier relationship, such as a merger between a bank and a leasing company.

Ex: Prudential’s acquisition of Bache &  Company.

5. Reserve Merger

A unique type of merger called a reserve merger is used as a way of going public without the expense and time required by an IPO. In case of ordinary merger, a profit making company take over another company which may or may not be making a profit. The objective is to expand or diversify the business.