Types of mergers

DIKSHA PRAKASH- BTech.-6th Semester | MINOR-LAW-ASSIGNMENT1 1
ASSIGNMENT 1: TYPES OF MERGERS
A merger is a business transaction where an acquiring company takeovers the target company
as a whole. This results in only one company remaining after the merger. The smaller target
company loses its existence and becomes a part of the bigger acquiring company.
The process of acquisition or a merger calls for a disciplined approach by the decision makers
at the company.
A merger is generally assumed to be the fusion of two companies. It signifies the dissolution
of one or more companies or firms or proprietorship to form or get absorbed into another
company. It increases the size of the undertakings.
The various types of mergers are:
1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Congeneric Merger
5. Reverse Merger
HORIZONTAL MERGER
Horizontal mergers happen when a company merges or takes over another company that
offers the same or similar product lines and services to the final consumers, which means that
it is in the same industry and at the same stage of production.
Companies, in this case, are usually direct competitors.
For example, if a company producing cell phones merges with another company in the
industry that produces cell phones; this would be termed as horizontal merger.
The two companies combine their operations and gains strength in terms of improved
performance, increased capital, and enhanced profits.
The main objectives of horizontal mergers are to benefit from economies of scale, reduce
competition, achieve monopoly status and control the market.

These kinds of merger also encourage cost efficiency, since redundant and wasteful activities
are removed from the operations i.e. various administrative departments or departments such
as advertising, purchasing and marketing.
The merger of HP and Compaq are examples of horizontal merger.
For e.g., in the banking industry in India, acquisition of Times Bank by HDFC Bank, Bank of
Madura by ICICI Bank, Nedungadi Bank by Punjab National Bank etc. in consumer
electronics, acquisition of Electrolux’s Indian operations by Videocon International Ltd., in
BPO sector, acquisition of Daksh by IBM, Spectramind by Wipro etc.
VERTICAL MERGER
This happens when two companies that have buyer seller relationship (or potential buyer-
seller relationship) come together.
Vertical merger is a kind in which two or more companies in the same industry but in
different fields combine together in business.
In this form, the companies in merger decide to combine all the operations and productions
under one shelter. It is like encompassing all the requirements and products of a single
industry segment.
A vertical merger is done with an aim to combine two companies that are in the same value
chain of producing the same good and service, but the only difference is the stage of
production at which they are operating.
For example, if a clothing store takes over a textile factory, this would be termed as vertical
merger, since the industry is same, i.e. clothing, but the stage of production is different: one
firm is works in territory sector, while the other works in secondary sector.
These kinds of merger are usually undertaken to secure supply of essential goods, and avoid
disruption in supply, since in the case of our example, the clothing store would be rest
assured that clothes will be provided by the textile factory.
It is also done to restrict supply to competitors, hence a greater market share, revenues and
profits. Vertical mergers also offer cost saving and a higher margin of profit, since
manufacturer’s share is eliminated.

There are two types of vertical mergers:
1. Backward Integration
A vertical integration where a company acquires the suppliers of its raw materials.
2. Forward Integration
A vertical integration where a company acquires the distribution channels of its products.
The popular examples of the same would be Pepsi’s merger with restaurant chains that it
supplies with beverages is a vertical merger. E-Bay buying PayPal is another example.
CONGLOMERATE MERGER
Such mergers involve firms engaged in unrelated type of business operations. In other words,
the business activities of the acquirer and the target are neither related horizontally or
vertically.
In a pure conglomerate merger, there are no important common factors between the
companies in terms of production, marketing, research and development and technology.
There may be however some degree of overlapping in one or more of these common factors.
Such mergers are in fact unification of different kinds of businesses under one flagship
company.
In this case, the business of the target company is entirely different from those of the
acquiring company. For e.g., a watch manufacturer acquiring a cement manufacturer or a
steel manufacturer acquiring a software company etc. The main objective of a conglomerate
merger is to achieve big size.
The purpose of merger remains utilization of financial resources, enlarged debt capacity and
also synergy of managerial functions. This is usually done to diversify into other industries,
which helps reduce risks.

A pure conglomerate merger is between companies with totally nothing in common. A mixed
conglomerate merger is between companies looking for market or product extensions. Thus, a
mixed conglomerate merger can be of two types:
1. Market Extension Mergers
Mergers between companies that have same products to offer but the markets are different.
The reason behind such mergers is access to bigger markets and an increase in client base.
2. Product Extension Mergers
A merger between companies that have different but related products but the markets are
same. Such mergers allow the companies to bundle their product offerings and approach
more consumers.
COGENERIC MERGER
Co-generic merger is a kind in which two or more companies in association are some way or
the other related to the production processes, business markets, or basic required
technologies.
It includes the extension of the product line or acquiring components that are all the way
required in the daily operations. This kind offers great opportunities to businesses as it opens
a huge gateway to diversify around a common set of resources and strategic
requirements. For eg., combination of a computer system manufacturer with a UPS
manufacturer.
In a congeneric merger, the companies may share similar distribution channels,
providing synergies for the merger.
An example of a congeneric merger is Citigroup's acquisition of Traveller’s Insurance. While
both were in the financial services industry, they had different product lines.
The acquired company represents an acquisition of product-line, market participants or
technologies of the acquirer. These mergers represent an outward movement by the acquirer
from its current business activities within the overarching industry structure.

FIGURE 1: Picture describing the various types of mergers.
(Image Source: www. cleverism.com)
REVERSE MERGER
Such mergers involve acquisition of a public (Shell Company) by a private company. It helps
the private company to by-pass lengthy and complex process required to be followed in case
it is interested in going public.
In this case, the buyer merges into the target and the shareholders of the buyer get stock in the
target. This is treated as a stock acquisition by the buyer.
This kind of merger is also known as ‘Back-door Listing’. This kind of merger has been
started as an alternative to go for public issue without incurring huge expenses and passing
through cumbersome processes.
Thus, it can be said that the reverse merger leads to the following benefits to the company:
1. Easy access to capital market
2. Increase in visibility of the company in corporate world
3. Tax benefits on carry forward losses acquired by the (public) company.
4. Cheaper and easier route to become a public company.

Besides the above mentioned mergers, there are a few miscellaneous mergers too based on
the various characteristics of the deal. They are described as under:
COMPLEMENTARY OR SUPPLEMENTARY MERGER
A complementary merger aims at compensating for some limitation of the acquiring
company. The target company may be an attempt to strengthen a process or enter a new
market.
A supplementary merger is one in which the target company further strengthens the acquiring
company. The target may be similar to the acquiring company in this case.
HOSTILE OR FRIENDLY MERGER
A merger can be hostile or friendly depending on the approval of its directors. If the board of
directors and the managers of the company are against the merger, it is a hostile merger. If
the merger is approved by them, it is a friendly merger.
ARM’S LENGTH MERGER
This type of a merger is a merger that is approved both by the disinterested directors and the
disinterested stockholders.
STRATEGIC MERGER
A merger of a target company has an aim of strategic holding over a longer term. An acquirer
may pay a premium to target in this case.
SUBSIDIARY MERGER
A subsidiary merger is said to occur when the buyer sets up an acquisition subsidiary which
merges into the target.
A subsidiary merger is one in which the target company becomes a subsidiary of the bigger
acquiring company. This happens because the target company may have a known brand or a
strong image which would make sense for the acquiring company to retain.
Company A + Company B = (Company A + Company B)

STATUTORY MERGER
A statutory merger is one in which all the assets and liabilities of the smaller company is
acquired by the bigger (acquiring) company. As a result, the smaller target company loses its
existence as a separate entity.
Company A + Company B = Company A
CONSOLIDATION MERGER
A consolidation merger is one in which both the companies lose their identity as separate
entities and become a part of a bigger new company. This is generally the case with both the
companies being of the same size.
Company A + Company B = Company C

REFERENCES:
1. Chapter 13: Mergers & Acquisitions: The Institute of Chartered Accounts of India.
2. http://www.mergersandacquisitions.in/types-of-mergers-and-acquisitions.htm
3. https://www.cleverism.com/different-types-of-mergers-and-acquisitions-ma/
4. http://accountlearning.com/7-different-types-of-mergers-with-examples/
5. https://efinancemanagement.com/mergers-and-acquisitions/classification-types-of-
mergers
6. http://www.investopedia.com/terms/c/congeneric-merger.asp
7. http://staffwww.fullcoll.edu/fchan/Micro/6mergers.htm

Types of mergers

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