Companies are going for record mergers these days. Before going for one, it is pertinent to understand which entity to merge with and what type of merger to go for. This is one of the vital factor to make an M&A deal successful. There are 5 types of mergers generally which we are going to discuss here (with real life examples):
A famous example would be a merger between HP (Hewlett-Packard) and Compaq in 2001, to create an $87 billion global technology leader. Thus, merger between companies that directly compete with each other are known as Horizontal mergers. These are done to increase market share, eliminate competition, improve cost structure, further utilize economies of scale, and exploit merger synergies.
A famous example in this category would be Pixar-Disney Merger. Walt Disney is one of the largest media and entertainment corporations in the world, whereas Pixar was an animation studio that created buzz with the release of its first feature film, Toy Story. On January 24, 2006, Disney announced that it had agreed to buy Pixar for approximately $7.4 billion.
Disney leveraged on Pixar’s computer animated characters to be used in its vast networks.
Thus, it can be said that a vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.
For ex: eBay & PayPal merger – in 2002, eBay bought PayPal, providing it with a streamlined payment process for its goods. Thus, it refers to the combination of two firms operating in industries unrelated to each other. In this case, the business of the target company is entirely different from those of the acquiring company. The main objective is to achieve product/market extension.
A merger between companies that sell the same products or services but that operate in different markets. The goal of a market-extension merger is to gain access to a larger market and thus a bigger client/customer base.
These occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company.
Ex: when Citicorp merged with financial services company Travelers Group in 1998 and joined forces to create Citigroup Inc. Both companies being in the financial services industry had different product lines. Citicorp offered consumers traditional banking services and credit cards. While Travelers, was known for its insurance and brokerage services. The congeneric merger between the two allowed Citigroup to become one of the biggest financial services companies in the world.
(The author of this article is a Practicing Company Secretary and can be reached at email@example.com)
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