A merger is when two companies that have dissolved, join together to become a new legal entity. On the other hand, they could also just rename one company to include both. The firms that agree to merge are roughly equal in terms of size, customers, and scale of operations. However, true mergers are uncommon because it’s rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs. Anyway, the goal behind this strategy is to expand a company’s reach into new segments, reduce costs of operations, expand to new territories, gain market share, and increase shareholder value.
There are 5 different types of merger:
- Conglomerate. A merger between firms that are involved in totally unrelated business activities, i mean, different industries or geographical regions. Pure Conglomerate Mergers involve firms with nothing in common. On the other hand, Mixed Conglomerate Mergers take place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions.
- Congeneric. Also known as a Product Extension merger, combines two or more companies in the same market sector. A new product line from one company is added to an existing product line of the other company. This way they are able to gain access to a larger group of consumers and market share
- Market Extension. A market extension merger takes place between two companies that deal in the same products but in separate markets. These companies seek to gain access to a bigger market and, thus, a bigger client base.
- Horizontal. A merger occurring between companies in the same industry that offer the same goods or services. Therefore, it serves as consolidation between two or more competitors offering the same products or services. Potential gains in market share are much greater for both companies using this strategy.
- Vertical. A merger between two companies producing different goods or services for one specific finished product. In other words, it’s like a collaboration where both companies combine their operations for the same goal.
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