Types of Mergers to Know and Understand
When companies form an agreement to join both entities together, it’s known as a merger. There are various reasons why this might be done. It may be to increase market share, streamline distribution or target a similar market. Here are five different types of mergers and real-world examples of each one:
A horizontal merger involves two direct competitors that choose to join forces and become a single company. It’s completed to take advantage of increased market share. An example of this type of merger involved computer manufacturers Compaq and Hewlett-Packard. The synergy between these two behemoths formed a single leader in the global technology space.
Vertical mergers take place between companies that are operating along a supply chain. By joining together, it improves quality control and the flow of information. A perfect example of this type of merger occurred in 2000 between Time Warner and America Online. In this case, AOL used the internet to distribute information and Time Warner utilized Time Magazine and CNN.
A market-extension merger includes companies that sell the same services or products. However, both companies operate in markets that are different. The main goal of teaming together is to create an access point to a bigger target market for one of the companies. For example, in 2002, a market-extension merger was completed between Eagle Bancshares and RBC Centura. It helped RBC gain access to the Tucker Federal Bank, which had assets worth $1.1 billion.
When companies sell related products or services in the same market, a product-extension merger will provide a larger base of customers for each company to sell to. This type of merger took shape between Broadcom and Mobilink Telecom Inc. It allowed the 2.5G and 2G technologies of Mobilink and the DSP, Bluetooth and 802.11 products of Broadcom to be sold in the same distribution channel.
Conglomerate mergers occur between two unrelated companies. Within this merger category, there are two different types: mixed and pure. Since this merger involves two companies that don’t offer related services or products and are in different markets, it provides a bigger risk than other types of mergers. An example of a conglomerate merger transpired between ABC and the Walt Disney Company. The Walt Disney Company focuses on entertainment, while ABC is involved with broadcast television.Share: