Types of Merger in detail

MEANING OF MERGER

The merger is a process wherein two or more companies/entities are combined to form either a new company or an existing company absorbing the other target companies. Basically, it’s a process to consolidate multiple businesses into one business entity with an objective to gain the competitive advantage and synergies in operations.

There are a number of advantages and reasons companies participate in mergers, including:

  • Combining resources
  • Removing trade barriers
  • Taking away competition
  • Creating a stronger company

FORMS OF MERGER

  1. MERGER THROUGH ABSORPTION – When two or more entities are combined, into an existing company, it is known as merger through absorption. In this type of merger, only one entity survive after the merger, while the rest of all cease to exist as they lose their identity.
  2. MERGER THROUGH CONSOLIDATION – When two or more companies combine together to create a new entity , it is known as merger through consolidation. This implies that all the companies to the merger are dissolved and lose their identity & a completely new entity is created.

TYPES OF MERGERS

The following are the different types of mergers that take place between two companies :-

  1. HORIZONTAL MERGER – A merger between companies that are in direct competition with each other in terms of product lines and markets is called horizontal merger. The motivation behind such merger is economies of scale and control of bigger market share.
  2. VERTICAL MERGER – A vertical merger is a type of merger in which a merger takes place between two companies where one company provides parts and services for the production of the products of another company. The motivation behind such mergers is cost efficiency, operational efficiency, increased margins and more control over the production or the distribution process.

It can be of two types, namely, forward integration & backward integration.

  1. CONGLOMERATE MERGER – It is a a type of business integration, in which the merging companies are not related to each other, i.e. neither horizontally nor vertically. A pure conglomerate merger is between companies with totally nothing in common. A mixed conglomerate merger is between companies looking for a market or product extensions.
  2. MARKET EXTENSION MERGERS – A merger between companies in different markets that sell similar products or services is known as market extension merger and is usually done to gain access to bigger markets and an increase in client base.
  3. CO-GENERIC MERGERS – Co-generic merger is when the companies undergoing merger operate in the same or related industry. However, their product lines are different i.e. they do not offer same products but related one.

Thus, in simple words a merger refers to an agreement in which two companies join together to form one company  to maximise company’s growth by expanding its production and marketing operations.

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