Mergers can happen for several different reasons and in many different ways. There are multiple types of mergers into which companies can enter. This article reviews five of the more common types of unions that exist today: vertical merger, horizontal merger, market extension merger, conglomerate merger, and product extension merger. The type of merger will depend on the function of that merger and the relationship between the merging companies.
With a vertical merger, the companies coming together have different positions within a specific supply chain. So, one company may make a particular component for a finished product while the merging company creates another element for that exact product. In merging, the companies foresee a more efficient way of operating and thus a more robust answer to a particular supply chain segment.
Generally, with a vertical merger, the companies involved aren’t direct competitors; that is to say, they are both needed to arrive at the finished product. Let’s look, for example, at Disney and Pixar. Disney benefits because they now own an animation studio to develop Disney-produced content. Pixar also benefits from leveraging Disney’s massive outreach and financial capabilities. This would be a prime example of a vertical merger.
Another type of merger is a horizontal merger. In this merger, two companies that are often considered competitors have decided to join forces and merge for the benefit of both firms. These mergers tend to happen more often in sectors in which fewer companies are operating, and, therefore, the market is not necessarily saturated. When competing firms merge in this way, there are monumental gains to be had as far as market share.
One of the more notable examples in recent years of a horizontal merger was between T-Mobile and Sprint. A flagging Sprint in merging with T-Mobile upped its customer base by about 100 million, thereby making the combined company a much stronger competitor in the market, now able to contend with the likes of Verizon and AT&T more effectively.
Market Extension Merger
As the name suggests, a market extension merger involves two companies that deal in the same products/services but occupy different markets. The objective of this merger is to increase the reach of both companies and expand the customer base.
Let’s take a hypothetical example of a market extension merger. For instance, if Amazon merged with Alibaba, this would likely fall under the category market extension merger. While Amazon essentially dominates western markets regarding e-commerce sales, a consolidation with Alibaba would extend and thus solidify its reach into markets where it may not have as strong a foothold. The customer base for the combined companies would be massive.
When talking about a conglomerate merger, the companies involved generally do not operate within the same market. In other words, their business activities usually are unrelated and have nothing to do with one another. This type of merger usually aims to increase the value of the companies merging. So if the value of the two companies combined is greater than the value of the companies separately, then this type of merger might make sense.
One of the more well-known examples of a conglomerate merger is eBay and PayPal. eBay purchased PayPal in a 2002 merger and, in the process, managed to streamline the payment process for its online auctions. As PayPal was already the most popular form of payment with eBay users, this merger made a great deal of sense. Eventually, the two companies did split in 2015.
Product Extension Merger
A product extension merger occurs when two companies operate in the same market but sell different products/services within that market. In this way, the companies can now group their products together and thus gain access to more customers. This generally equates to higher profits for the newly merged organization.
At one point, Pepsi Co. owned both Pizza Hut and Taco Bell, among other chain establishments of this nature. While the companies have different offerings within this market segment, both were able to increase sales exponentially by joining together.
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