Mergers and Acquisitions

are the ways in which businesses get combined.
They can be little intricate to understand with all the legal

and tax issues surrounding the deals. Mergers and acquisitions are two different business combinations,
although they are thought of as a generic term. Both mergers and acquisitions can be classified further to
differentiate the ways the companies can do business combinations.
Definition of Merger:
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.
Basis of Classifications: Mergers can be differentiated into various types depending on the following:
o
o
Integration Form: Mergers can be classified depending on how both the

companies physically combine themselves in the transaction to form one entity.
Relatedness of Business Activities: Mergers can be classified depending on
how the business activities of both the companies relate to each other. The
economic function and the purpose of the transaction define the types of mergers.
Classification by the Form of Integration:

The mergers can be classified as follows on the basis of forms of integration:
o
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
Subsidiary Merger: 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)
Consolidation: 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
Classification on the Basis of Relatedness of the Business Activities:

The mergers can be classified as follows on the basis of relatedness of the business activities:
o
Horizontal Merger: A merger that happens between companies belonging to the

same industry. The companies have businesses in the same space and are
generally competitors to each other. A horizontal merger is a feature of an industry
which consist of a large number of small firms / fragmented industry. The level of
competition is high and the post-merger synergies and gains are much higher for
companies in such industries. The motivation behind such merger is economies of
scale and control of bigger market share.
Vertical Merger: A vertical merger is a merger between companies that produce

different goods or offer different services for one common finished product. The
companies operate at different levels in the supply chain of the same industry. The
motivation
behind
such
mergers
is
cost
efficiency,
operational
efficiency, increased margins and more control over the production or the
distribution process. There are two types of vertical mergers:
Backward Integration: A vertical integration where a company
acquires the suppliers of its raw materials.
Forward Integration: A vertical integration where a company acquires
the distribution channels of its products.
Conglomerate Merger: A merger between companies that operate in completely
different and unrelated industries. 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.
Market Extension Mergers: A merger 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.
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.
Besides the above classifications, there are other characteristics of the deals also, that may further define
the types of mergers:
o
o
o
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.
Arms 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 with an aim of strategic holding
over a longer term. An acquirer may pay a premium to target in this case.
Conclusion:
A business combination gets complex not only with the legal issues but also with the type of a merger. A
merger can vary according to the way companies come together or their economic functions. It is
important to understand the type of merger to appreciate the intricacies involved.
There are five commonly-referred to types of business combinations known as mergers: conglomerate merger,
horizontal merger, market extension merger, vertical merger and product extension merger. The term chosen to
describe the merger depends on the economic function, purpose of the business transaction and relationship
between the merging companies.
Conglomerate
A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed
conglomerate mergers involve firms that are looking for product extensions or market extensions.
Example
A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same
competition in each of its two markets after the merger as the individual firms were before the merger. One example
of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting
Company.
Horizontal Merger
A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that
occurs between firms who operate in the same space, often as competitors offering the same good or service.
Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies
and potential gains in market share are much greater for merging firms in such an industry.
Example
A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal
of a horizontal merger is to create a new, larger organization with more market share. Because the merging
companies' business operations may be very similar, there may be opportunities to join certain operations, such as
manufacturing, and reduce costs.
Market Extension Mergers

A market extension merger takes place between two companies that deal in the same products but in separate
markets. The main purpose of the market extension merger is to make sure that the merging companies can get
access to a bigger market and that ensures a bigger client base.
Example
A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura.
Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and
looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan
Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this
acquisition enables the RBC to go ahead with its growth operations in the North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the
leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.
Product Extension Mergers

A product extension merger takes place between two business organizations that deal in products that are related to
each other and operate in the same market. The product extension merger allows the merging companies to group
together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Example
The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom
deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless
LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the
Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless
networking chips that have high speed and General Packet Radio Service technology. It is expected that the products
of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.
Vertical Merger
A merger between two companies producing different goods or services for one specific finished product. 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.
Example
A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An
automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow
the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The
parts division, in turn, would be guaranteed a steady stream of business.
Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the
separate individual parts is one of the reasons companies merger.

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Mergers and Acquisitions

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are the ways in which businesses get combined.

They can be little intricate to understand with all the legal

Integration Form: Mergers can be classified depending on how both the

Classification by the Form of Integration:

Subsidiary Merger: A subsidiary merger is one in which the target company

Consolidation: A consolidation merger is one in which both the companies lose

Classification on the Basis of Relatedness of the Business Activities:

Horizontal Merger: A merger that happens between companies belonging to the

Vertical Merger: A vertical merger is a merger between companies that produce

Complementary or Supplementary Merger: A complementary merger aims at

Market Extension Mergers

Product Extension Mergers

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