Small businesses conduct mergers and acquisitions for the same reasons large corporations do – to strengthen positions in one or more markets, gain access to new markets, increase efficiency or just diversify a company's offerings. There are several types of merger strategies of particular interest to small businesses and each has something to offer depending on your company's goals. Show
TipThe three main types of merger are horizontal mergers which increase market share, vertical mergers which exploit existing synergies and concentric mergers which expand the product offering. Mergers vs. AcquisitionsA discussion about corporate combinations should note that, strictly speaking, true mergers are rare. A merger occurs when two companies come together as equals and form an entirely new company. Many business combinations billed as "mergers" are really one of several types of acquisition. If a company buys another and absorbs its operations, it has completed an acquisition. The distinction is mostly technical, although calling the deal a merger shows deference to and respect for the other company's employees and former owners. Horizontal Mergers Increase Market ShareHorizontal mergers involve companies that offer the same products or services to the same kinds of customers. If your business mows lawns and you combine with another lawn-care company in your town, that's a horizontal merger example. Horizontal mergers offer "economies of scale," meaning that average costs decline as the company does a greater volume of business. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies: Where the original companies each needed their own purchasing department, advertising budget, benefits program and so on, the merged firm only requires one. Vertical Mergers Create SynergyA vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. Say you own a manufacturing company that makes items out of plastic. Merging with a company that makes raw plastics would be a vertical merger. Vertical mergers help prevent business disruptions; the manufacturing operation no longer has to worry about obtaining enough plastic, while the plastics operation gets a steady customer. Cost savings through eliminating redundant functions are also possible. Concentric Mergers Expand OfferingsConcentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but don't offer them the same products or services. If you owned a catering company, for example, and you merged with a business that rents tables, chairs, event tents and party equipment, that would be a concentric merger. Both companies appeal to customers who have events to plan, but not in the same way. Concentric mergers diversify the combined company's offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business, because the firm becomes more of a "one-stop shop" offering more of the services that both companies' customers are typically looking for. Conglomerate Mergers: a Fourth PossibilityAlthough not as common as they were during the 1960s and '70s, a fourth type of merger is the conglomerate merger. In this business move, two companies from different industries or geographic locations join forces. In a pure conglomerate merger, the companies are completely unrelated in their product offerings. In a mixed conglomerate merger, the companies are looking to expand their product offerings or market reach by joining with another company. One of the advantages of these types of corporate combinations is that the new company now has the ability to reach a wider market by expanding its customer base. The combined company has access to all the customers familiar with products sold by the separate entities and can now market to everyone. However, these mergers are often difficult to pull off effectively as the two unlike entities must function together and adjust their operating processes, business models and corporate cultures. Different types of M&A in the corporate world What is a Merger?A merger refers to an agreement in which two companies join together to form one company. In other words, a merger is the combination of two companies into a single legal entity. In this article, we will look at different types of mergers that companies can undergo.  Types of MergersThere are five basic categories or types of mergers:
Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course. Horizontal MergersA horizontal merger is a merger between companies that directly compete with each other. Horizontal mergers are done to increase market power (market share), further utilize economies of scale, and exploit merger synergies. A famous example of a horizontal merger was that between HP (Hewlett-Packard) and Compaq in 2011. The successful merger between these two companies created a global technology leader valued at over US$87 billion. Vertical MergersA vertical merger is a merger between companies that operate along the same supply chain. A vertical merger is the combination of companies along the production and distribution process of a business. The rationale behind a vertical merger includes higher quality control, better flow of information along the supply chain, and merger synergies. A notable vertical merger happened between America Online and Time Warner in 2000. The merger was considered a vertical merger due to each company’s different operations in the supply chain – Time Warner supplied information through CNN and Time Magazine while AOL distributed information through the internet. Market-Extension MergersA market-extension merger is 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. For example, RBC Centura’s merger with Eagle Bancshares Inc. in 2002 was a market-extension merger that helped RBC with its growing operations in the North American market. Eagle Bancshares owned Tucker Federal Bank, one of the biggest banks in Atlanta, with over 250 workers and $1.1 billion in assets. Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course. Product-Extension MergersA product-extension merger is a merger between companies that sell related products or services and that operate in the same market. By employing a product-extension merger, the merged company is able to group their products together and gain access to more consumers. It is important to note that the products and services of both companies are not the same, but they are related. The key is that they utilize similar distribution channels and common, or related, production processions or supply chains. For example, the merger between Mobilink Telecom Inc. and Broadcom is a product-extension merger. The two companies both operate in the electronics industry and the resulting merger allowed the companies to combine technologies. The merger enabled the combination of Mobilink’s 2G and 2.5G technologies with Broadcom’s 802.11, Bluetooth, and DSP products. Therefore, the two companies are able to sell products that complement each other. Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course. Conglomerate MergersA conglomerate merger is a merger between companies that are totally unrelated. There are two types of a conglomerate merger: pure and mixed.
The biggest risk in a conglomerate merger is the immediate shift in business operations resulting from the merger, as the two companies operate in completely different markets and offer unrelated products/services. For example, the merger between Walt Disney Company and the American Broadcasting Company (ABC) was a conglomerate merger. Walt Disney Company is an entertainment company, while American Broadcasting company is a US commercial broadcast television network (media and news company). More ResourcesThank you for reading CFI’s guide to Types of Mergers. To learn more and expand your career, explore the additional relevant CFI resources below:
What is a joining of two or more businesses that are involved in different stages of producing the same good or service?Vertical Mergers Create Synergy
A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production.
What is the combination of two or more firms involved in different stages?A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.
What is it called when two companies join together?A company merger is when two companies combine to form a new company. Companies merge to expand their market share, diversify products, reduce risk and competition, and increase profits.
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What is the term for the joining of two or more firms involved in different stages of producing
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