A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies agreeing to merger are typically equal in terms of size and scale of operations.
1. Congeneric/Product extension merger
Such mergers happen between companies operating in the same market. The merger results in the addition of a new product to the existing product line of one company. As a result of the resultant, company can access a larger customer base and increase their market share.
2. Conglomerate merger
Conglomerate merger is a merger between two or more companies operating in unrelated activities. Such merger will take place only if it increases the wealth of the shareholders.
3. Reverse merger
Companies operating in different markets, but selling the same products, combine in order to access a larger market and larger customer base.
4. Horizontal merger
Horizontal Merger is a merger between companies selling similar products in the same market and in direct competition and share the same product lines and markets. It decreases competition in the market.
5. Vertical merger
A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency.
1. Increases market share
Companies merges with other companies to reach new markets and grow revenues and earnings. A merger may expand two companies’ marketing and distribution network, giving them new sales opportunities and by providing new operating market. A merger also improves company’s standing in the investment community.
2. Elimination of Competitors
This is a very powerful motivation for mergers and acquisitions, and is the primary reason why Merger occurs in distinct cycles. Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers.
3. Economies of scale
Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions. The investments on assets are now spread out over a larger output, which leads to technical economies.
4. Expands business into new geographic areas
A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started.
5. Prevents closure of an unprofitable business
Mergers can save a company from going bankrupt and also save many jobs.
6. Acquiring new technology :
To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
7. Tax benefits :
Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.
1. Creates gaps in communication
The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.
2. Creates unemployment
In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.
3. Prevents economies of scale
In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.