Types of Mergers

F r o m t h e p e r s p e c t i v e o f b u s i n e s s s t r u c t u r e s , t h e r e i s a w h o l e h o s t o f d i f f e r e n t mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
a. Horizontal merger

- Two companies that are in direct competition and shares i m i l a r p r o d u c t l i n e s a n d m a r k e t s , j o i n t o g e t h e r i t i s k n o w n a s a h o r i z o n t a l merger. The idea behind this type of merger is to avoid competition between theunits. (e.g.: two manufacturers of same type of cloth, two transport com panieso p e r a t i n g o n t h e s a m e r o u t e - t h e m e r g e r i n a l l t h e s e c a s e s w i l l b e h o r i z o n t a l merger.
b. Vertical merger

- A customer and company or a supplier and company. (e.g.:an ice cream maker merges with the dairy farm that they previously purchased milk from; now, the milk is 'free')
c. Market-extension merger

- T w o c o m p a n i e s t h a t s e l l t h e s a m e p r o d u c t s i n different markets (e.g.: an ice cream maker in the United States merges with anice cream maker in Canada)
d. Product-extension merger

- Two companies selling different but related products in the same market (e.g a cone s u p p l i e r m e r g i n g w i t h a n i c e c r e a m maker).
e. Conglomeration

- Two companies that have no common business areas wheret w o m e r g i n g f i r m s a r e i n t h e s a m e g e n e r a l i n d u s t r y, b u t t h e y h a v e n o m u t u a l buyer/customer or supplier

relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they weres yn o n ymo u s , t h e t e r ms me r g e r a n d a c q u i s i t i o n me a n s l i g h t l y d i f f e r e n t t h i n g s . When one company takes over another and clearly established itself as the newowner, the purchase is called an acquisition. From a legal point of view, thetarget companyceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when twofirms, often of about the same size, agree to go forward as a single new companyr a t h e r t h a n r e ma i n s e p a r a t e l y o wn e d a n d o p e r a t e d . Th i s k i n d o f action is mo r e p r e c i s e l y r e f e r r e d t o a s a " m e r g e r o f e q u a l s . " B o t h c o m p a n i e s ' s t o c k s a r e surrendered and new company stock is issued in its place.Regardless of their category or structure, all mergers and acquisitions have one c o mmo n g o a l : t h e y a r e a l l me a n t t o c r e a t e s yn e r g y t h a t ma k e s t h e v a l u e o f t h e c o mb i n e d c o mp a n i e s g r e a t e r t h a n t h e s u m o f t h e t wo p a r t s . Th e s u c c e s s o f a merger or acquisition depends on whether this synergy is achieved.10

Economics/Reasons of mergers
A number of mergers, take -overs and consolidation have take place in the rec ent t i m e s . T h e m a j o r r e a s o n c i t e d , f o r s u c h m e r g e r s , i s t h e l i b e r a l i z a t i o n o f econom y. Liberali zation is forcing comp anies to enter new business, exit from others, and consolidate in some simultaneously. The following are theother important reasons for mergers or amalgamations:
Economies of scale

. An amalgamation company will have more reasons at itscommand that the individual companies. This wi ll help in increasing the scaleo f o p e r a t i o n s a n d t h e e c o n o m i e s o f l a r g e s c a l e w i l l b e a v a i l a b l e . T h e s e e c o n o m i e s w i l l o c c u r b e c a u s e o f m o r e i n t e n s i v e u t i l i z a t i o n o f p r o d u c t i o n facilities, distribution network, res ea rch and developm ent facilities, etc. thes ee c o n o m i e s w i l l b e a v a i l a b l e i n h o r i z o n t a l m e r g e r s w e r e s c o p e o f m o r e intensive use of resources is greater.
Operating economies

. A number of operating economies will be availed withthe merger of t wo or more c ompanies. Duplicating facilities in accounting, p u r c h a s i n g , m a r k e t i n g , e t c . w i l l b e e l i m i n a t e d . O p e r a t i n g i n e f f i c i e n c i e s o f small conc erns wi ll be controlled by the superior management emerging fromth e amalgamation. The ama lgamat ed company will b e in a better position to operate than the amalgamating companies individually.
Synergy

: S yn ergy refers to the greater combined value of m erged firms than t h e s u m o f t h e v a l u e s o f i n d i v i d u a l u n i t s . I t i s s o m e t h i n g l i k e o n e p l u s o n e more than two. It resu lts from ben efits other than those relat ed to economies o f s c a l e . O p e r a t i n g e c o n o m i e s a r e one of the various synergy benefits of

merger or consolidation. The other instances which may result into synergy b e n e f i t s i n c l u d e s , s t r o n g R & D f a c i l i t i e s o f o n e f i r m m e r g e d w i t h b e t t e r organized facilities of another unit, enhanced managerial capabilities, thes u b s t a n t i a l f i n a n c i a l r e s o u r c e s o f o n e b e i n g c o m b i n e d w i t h p r o f i t a b l e investment opportunities of the other.
Growth

: A company may not grow rapidly throw internal expansion. Merger or amalgamation enables satisfactory and balanced growth of a company. Itcan cross many stages of growth at one time through amalgamation. Growththrough merger or amalgamation is also cheape r and less risky. A number of costs and risk of expansion and taking on a new product line are avoided bythe acquaint of a going concern. By acquiring other companies a desired level of growth can be maintained by an enterprise.
Diversification

: T w o o r m o r e c o m p a n i e s o p e r a t i n g i n d i f f e r e n t l i n e s c a n diversify their activities through amalgamation. Since different companies area l r e a d y d e a l i n g i n t h e i r r e s p e c t i v e l i n e s t h e r e w i l l b e l e s s r i s k i n diversification. When a company tries to enter new lines of activi ties then itm a y f a c e a n u m b e r o f p r o b l e m s i n p r o d u c t i o n , m a r k e t i n g e t c . w h e r e s o m e concerns are already operating in different lines, they must have crossed manyobstacles and difficulties. Amalgamation will bring together the experience of different persons in various activities. So amalgamation will be the best wayof diversification.
Utilization of tax shield

: When a company with accumulate losses merges w i t h a p r o f i t m a k i n g c o m p a n y i t i s a b l e t o u t i l i z e t a x s h i e l d s . A c o m p a n y having losses will not be able to setoff losses against future profits, because iti s n o t a p r o f i t m a k i n g u n i t . O n t h e o t h e r h a n d i f i t m e r g e s w i t h a c o n c e r n 15

making profits then the accumulated losses of one unit will be set off againstthe future profits of t he other unit. In this way the merger or amalgamation will enable the concern to avail tax benefits.
Increase in value

: one of the main reasons of merger or amalgamation is theincreaser in value of the merged company. The value of merged company is greater than the sum of the independent values of the merged company.
Elimination of competition

: t h e m e r g e r o r a m a l g a m a t i o n o f t w o o r m o r e companies will eliminate competition among them. The companies will beable to save their advertisement expenses thus enabli ng them to reduce their prices. The consumers will also benefit in the form of cheap or goods being available to them.
Better financial planning

: the merged companies will be able to plan their resources in a better way. The collective finances of merged companies will be more and their utilization may be better than in the separate concerns. It m a y happen that one of the merging companies has short gestation periodwhile the other has the longer gestation period. The profits of the companywith short gestati on period will be u t i l i z e d t o f i n a n c e t h e o t h e r c o m p a n y . When the company with the longer gestation period starts eating profits then itwill improve financial position as a whole.
Economic necessity

: It may force the merger of some units. If there are two s i c k u n i t s , g o v e r n m e n t m a y f o r c e t h e i r m e r g e r t o i m p r o v e t h e i r f i n a n c i a l position and over all working .a sick unit may be required to merge with theh e a l t h y u n i t t o i n s u r e b e t t e r u t i l i z a t i o n o f r e s o u r c e s , i m p r o v e a n d b e t t e r manage ment. Rehabilitation of sick units is asocial necessity because their closure may result in UN employment etc.