Merger Definition, Benefits, Types And Examples

Merger is a term that is familiar in the business world. The merger is carried out within the framework of the company’s strategy so that its business scale becomes larger. What is a merger?

In simple terms, a merger is the merging of two or more companies to form a new company resulting from the merger.

The definition of a merger is

Quoted from Investopedia, a merger is an agreement that unites two existing companies into one new company.

There are several types of mergers and also several reasons why companies do a merger. In addition to mergers, other terms that are almost similar but not the same are acquisitions.

Mergers and acquisitions are usually done to expand a company’s reach, expand into new segments, or gain market share.

All this is done to increase the value of the company and shareholders. Often, during a merger, a company has a special clause to prevent a purchase or merger by another company.

The objectives and benefits of the merger are

The union of two companies in this merger is usually by means of transfer of ownership through the exchange of shares or cash payments. The newly merged company will issue new shares with proportional share ownership.

The merged company certainly has greater assets because the merged company’s assets are combined. Another positive impact is that the merged company has a wider market.

A merger is a voluntary merger of two companies on broadly similar terms into one new legal entity. The companies that agreed to merge were roughly equal in terms of size, customers, and scale of operations.

For this reason, the term “merger of equals” is sometimes used. Acquisitions , unlike mergers, are generally involuntary and involve one company actively buying another.

Mergers are most often done to gain more market share, reduce operating costs, expand into new territories, unite products together, increase revenue, and increase profits, all of which must benefit the company’s shareholders.

After the merger, the shares of the new company are distributed to the old shareholders of the two original businesses.

Types and examples of mergers

There are different types of mergers in business, depending on the objectives of the companies involved. Below are some of the most common types of mergers.

1. Conglomerate

A conglomerate merger is a merger between two or more companies that are involved in unrelated business activities. Companies may operate in different industries or in different geographic areas.

A pure conglomerate involves two companies that have nothing in common. The conglomerate merger formed when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995.

2. Congeneric

Congeneric mergers are also known as product extension mergers. This type is a combination of two or more companies operating in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D).

Product expansion mergers are achieved when a new product line from one company is added to an existing product line from another company.

When two companies become one under a product extension, they can gain access to a larger consumer group and, thus, a larger market share.

An example of a congeneric merger is the 1998 merger of Citigroup with Travelers Insurance, two companies with complementary products between banking and insurance.

3. Market Expansion

This type of merger occurs between companies that sell the same product but compete in different markets. Companies involved in market expansion mergers seek to gain access to a larger market and, thus, a larger consumer base. To expand their market, Eagle Bancshares and RBC Centura merged in 2002.

4. Horizontal Merger

Horizontal mergers occur between companies operating in the same industry. A merger is usually part of a consolidation between two or more competitors that offer the same product or service.

Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale as competition among fewer firms tends to be higher.

The 1998 merger of Daimler-Benz and Chrysler is considered a horizontal merger.

5. Vertical merger

A vertical merger is when two companies operating at different levels in the supply chain of the same industry combine their operations.

The merger is carried out to increase the synergies achieved through cost reductions resulting from the merger with one or more supplier companies.

One of the most famous examples of vertical mergers occurred in 2000 when internet provider America Online (AOL) merged with media conglomerate Time Warner.

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