5 Types of Company Mergers

Companies wanting to expand their reach and attract new customers have five strategies at their disposal:

  • Marketing new products in their same industry
  • Expanding their current products into new industries
  • Increasing current products or adding new features
  • Selling new products in new industries
  • Acquiring other companies.

That last strategy is called a merger, and it's the focus of this blog.

Recent mergers have captured the attention of the business world and are considered a blockbuster move to consolidate and grow power. These actions allow dominating businesses to further overtake their competition and dramatically increase profits by uniting products and services, expanding into new territories, reducing operating costs, and increasing market share. Mergers have become more prevalent among businesses over the years, so it's important to understand the differences occurring with each deal.

Types of Mergers

Companies have five different types of mergers when rolling out this strategy.

  • Conglomerate
  • Congeneric
  • Market Extension
  • Horizontal
  • Vertical

Conglomerates

Conglomerates are mergers between two companies in completely unrelated markets. This merger comes in two different types: pure and mixed. Pure conglomerates are two companies with no crossover in their business, while mixed conglomerates involve two companies that merged to expand their markets, products, and services.

A mixed conglomerate allows both businesses to synergize and reap many financial benefits, such as improved profits through diversification and lessened risk of losses. Furthermore, if one business sector is underperforming, the second business can compensate for the losses.

Conglomerates also come with their fair share of disadvantages, as some believe that they stifle innovation or reveal their fair share of cultural differences.

Congeneric

Congeneric or product extension mergers occur when two or more companies in the same market combine. These past competitors come together to add the newer product line of one company onto the product line of the other. Both companies are in a similar industry and offer similar products. An example of a congeneric merger would be the late 1990s fusion of Exxon and Mobil, which created ExxonMobil. ExxonMobil became one of the world's largest companies and showed why this union of two or more companies is such a popular option.

Some of the downsides of congeneric mergers include a loss of efficiency, clashing of cultures, and a shift away from the core business. However, the synergy created by the combined performance of both companies is the sought-after upside.

Market Extension

Market extensions are a combination of two different companies in two different markets that sell the same products. The companies going through this process are pursuing access to a bigger market and client base. The 1977 merger of Pizza Hut and PepsiCo has stood as one of the hallmark market extension mergers to this day, and it precipitated the formation of Yum! Brands. Pizza Hut has maintained its status as an international leader in pizza restaurants, and Pepsi products are the only beverages sold in the franchise restaurants.

Horizontal

Horizontal mergers happen when two companies are in the same industry and offer the same products. Horizontal mergers are similar to congeneric mergers, but the key difference is that no new products will be acquired. This action is more common in industries with less competition and fewer firms, as the goal is to create a larger business with a greater market share. Increasing production while reducing costs is the biggest advantage and can be seen from mergers & acquisitions such as T-Mobile and Sprint or PepsiCo and Rockstar.

Vertical

Vertical mergers are the last of the five types of mergers and possibly one of the hardest to spot. These occur when combining two companies in two different levels of the same industry's supply chain. A synergy is created by both companies combining their operations to reduce costs. One of the best examples of a vertical merger is when America Online became one parent company with Time Warner in 2000.

Publicly traded companies merging is one of the biggest developments to watch for as more companies choose that route every decade. It is important not only to shareholders and employees but to the public served by these companies.

If you're interested in mergers & acquisitions, our firm can lead you toward strategies for success. Reach out today for a consultation.




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