Definition of Merger, Benefits, Types, Advantages and Disadvantages

Mergers are a business strategy often used by companies to strengthen their position in the market.

However, what actually drives companies to merge? What are the benefits for the business and shareholders?

In this article, let's take a closer look at mergers, starting from the meaning, benefits, types, to the advantages and disadvantages!

Definition of Merger

A merger is a process in which two or more companies combine into one legal entity.

Usually for the purpose of strengthening market position, increasing operational efficiency, or achieving business synergies. The two merging companies usually have relatively the same size and scale of operations.

Merger Benefits

Companies choose to merge for various reasons, ranging from the desire to increase efficiency to getting greater profits.

Here are some of the benefits of why mergers are carried out:

1. More resources: With a merger, the new company has more resources such as employees, facilities, and capital.
2. Benefits to shareholders: Shareholders of the merging companies usually get shares in the new company thereby benefiting them.
3. Enter new markets or add products/services: Mergers allow companies to enter new markets or add more products and services.
4. Reduce tax burden: Mergers can help companies reduce tax burden, if one of the merging companies has tax losses.
5. Reduced competition: With a merger, competition between two companies is reduced as they become one company.
6. Get assets faster: Mergers allow companies to get assets from other companies.
7. Better resource management: With mergers, companies can manage resources more efficiently thereby reducing costs.

Types of Mergers

Following are the types of mergers:

1. Horizontal Merger

A horizontal merger is when two companies in the same industry merge. Usually, these companies are competitors that offer similar products or services.

By joining forces, companies can become bigger and get more customers. When these two companies merge, they combine all their customers and resources.

For example, if Coca-Cola and Pepsi merged, they would become the largest beverage company because they are the two largest soft drink producers.

By joining forces, they can combine production or distribution processes, thereby saving costs and increasing efficiency.

2. Vertical Merger

A vertical merger is when two companies that produce different goods or services work together to create one product.

Typically, these companies do not compete with each other, but support each other in the production process to produce the final product.

The main reason is to create “synergy,” which is when two companies joining forces generate greater value than if they operated separately.

Synergies can occur when these companies can share resources, reduce costs, and increase efficiency by joining forces.

An example of a vertical merger is if a car company merges with a spare parts supplier. By joining forces, car companies can get better prices for parts because they have direct control over their suppliers.

Additionally, car companies can better control the quality and production of parts. On the other hand, spare parts suppliers benefit because they have repeat customers.

3. Market Extension Merger

Market extension mergers occur when two companies that sell the same product but are in different markets merge.

The main aim of this merger is to expand market reach and gain access to more customers. For example, when a large bank buys a smaller bank in another city.

For example, RBC Centura, a large bank operating in various places in the United States acquired Eagle Bancshares a smaller bank located in Atlanta, Georgia.

By purchasing Eagle Bancshares, RBC Centura can begin operations in the city of Atlanta and gain access to all the customers and assets owned by Eagle Bancshares.

Since Eagle Bancshares is a local bank with many customers, RBC Centura benefits from this expansion by gaining more customers and strengthening their presence in the United States.

4. Product Extension Merger

A product extension merger occurs when two companies that sell similar or related products merge into one. They usually operate in the same field, but have different product lines.

When they join, they offer more products to customers so they can attract more customers and earn more profits.

For example, Broadcom (a company that makes Bluetooth devices) bought Mobilink Telecom Inc. (a company that makes designs for cell phones with GSM technology).

By joining forces with Broadcom and Mobilink, they can offer Bluetooth products as well as technology for mobile phones.

5. Conglomerate Merger

A conglomerate merger occurs when two companies involved in different businesses decide to merge. The two have nothing in common in terms of products, services or the industry in which they operate.

There are two types of conglomerate mergers, namely:

• Pure Conglomerate: Merging companies have absolutely nothing in common.
• Mixed Conglomerate: Merging companies have little in common or want to expand their products or markets.

An example of a conglomerate merger is when a shoe manufacturer merges with a soft drink company. They come from different industries, but decided to merge to become bigger.

Another example is when the Walt Disney Company, known for films and theme parks, merged with the American Broadcasting Company (ABC), which focused on television broadcasting.

Advantages and Disadvantages of Mergers

Mergers can be an effective way for companies to grow and expand their business.

By carrying out a merger, companies can increase market share and reduce costs.

However, the decision to merge also requires careful consideration because there are risks and challenges that need to be overcome.

The following are the advantages and disadvantages of mergers:

Advantages of mergers

1. Increase market share: When companies merge, the new company has a larger market share and has an edge over the competition.
2. Reduce operational costs: Merging companies can save costs. For example, they can buy raw materials in large quantities at cheaper prices.
3. Avoid duplication: If two companies make the same product, they can merge to avoid doing the same thing separately.
4. Business expansion: Mergers can help companies to expand their business into new areas.
5. Prevent bankruptcy: Mergers can save companies experiencing financial difficulties, avoid business closures, and preserve jobs.

Disadvantages of mergers

1. Price increases: Mergers can reduce competition, allowing new companies to raise the prices of their products or services due to monopoly.
2. Communication issues: Merging companies may have different cultures which can cause miscommunication and impact employee performance.
3. Unemployment: In undertaking a merger, a company may write off unprofitable assets causing some employees to lose their jobs.
4. Difficult to achieve economies of scale: If the merging companies do not have much in common, it is difficult to achieve synergies and economies of scale.

Mergers are a business strategy that companies often use to strengthen market positions, increase operational efficiency, and achieve various synergies. Through mergers, companies can gain more resources, expand business reach, and reduce competition.

However, mergers also have risks that need to be considered, such as communications, possible price increases, and unemployment due to asset reduction.

Want to learn more about mergers and business? Join the Strategic Alliances in Business class now!