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A merger is a type of an agreement where two companies join together to form a new enterprise. Previously, Anand Jayapalan had discussed how a merger is the combination of two companies into a single legal entity and can take place due to multiple reasons. Businesses might decide to merge to diversify offerings, increase profits, get a competitive advantage, cut costs, gain market share and expand into new segments.
Here are some of the most common types of mergers:
- Horizontal: A horizontal merger takes place between two businesses in the same industry. These companies are likely to provide the same type of products or services, and have the same target audience. The key goal of a horizontal merger is to improve the market share and reach of a company by coming together as a single enterprise. For instance, if one owns a boutique and they decide to merge with another boutique in the city, they would be fusing their business with a direct competitor and form a single brand. Horizontal are common in industries with high competition.
- Vertical: Vertical mergers take place between two businesses that are in the same industry, but at varied points in the supply chain merge operations. Companies in a vertical merger are likely to offer varied services or products along the supply chain, and work towards delivering one final product. Vertical mergers are generally carried out in order to improve logistics and operating efficiency, as well as reduce expenses. A company in the auto parts industry merging with a business that supplies raw materials for auto parts can be an example of a vertical merger.
- Concentric: Also known as a product extension merger, these mergers take place between companies that are in the same market but sell different but related products or services. Such mergers help companies to group their services or products together, and ultimately access a larger set of consumers. As they sell different products, these companies tend to be indirect competitors. Concentric mergers typically can drive more business by becoming a one-stop shop for customers. This expanded offering of products or services can attract a broader consumer base. A catering company merging with a party planning company is a good example of a product extension merger, as both entities operate in the same industry, and provide distinct but related offerings to customers.
- Conglomerate: A conglomerate merger takes place when two or more enterprises in varied industries or geographic locations tend to come together with the goal of broadening their range of offerings. In these mergers, the companies involved engage in completely unrelated business activities. For example, one might be a software company and the other can be an insurance business.
- Market-extension: Such mergers involve a consolidation of companies operating in distinct markets yet offering similar products or services. In this type of merger, businesses market the same or akin products/services but target different market segments. Such mergers are sought by companies aiming to tap into broader markets and expand their customer base.
Earlier, Anand Jayapalan had spoken about how regardless of the type of merger a company takes part in, its goal would be to increase size, scale, and revenue. In other words, mergers help companies make more money.