Merger
When several companies join together to form a new business and they create one organizational structure, a reorganization procedure called a merger is carried out. Mergers can be structured in many ways, depending on different factors. They are generally done to take business to the next level and increase market share. The main goals of mergers are to increase profits and generate more returns for investors. When a company comes together with another firm, it is usually banned from merging by additional firms.
Merger explained
Merger or acquisition is one of the forms of business reorganization. In mergers, a new company is formed from the two organizations. There are two options available: the companies merge into the new one and they cease to exist or the assets of two different companies consolidate and the firms are not liquidated after the procedure. The term “merger of equals” refers to the process, in which two firms of approximately equal size decide to merge into one entity.
Merger and acquisition are two different procedures. A merger is defined as the consolidation of two or more organizations that establish a new company on a voluntary basis, while the acquisition is when one company buys another one.
Merger is an excellent tool for business development. It enables companies to increase market share, cut operating costs and expenses, expand to different countries, and grow profitability. The company’s shareholders, in turn, will be entitled to get more profit out of it. After the procedure is done, the securities of the new organization are distributed to the shareholder that owned shares of two companies before merger.
Types of Mergers
Mergers can be divided into 5 main types, depending on the objectives of organizations and relationship between the firms involved.
Conglomerate. A conglomerate is a corporation that consists of several independent companies operating in different industries. A mixed conglomerate is a form of conglomerate in which businesses strive to gain market share and extend product lines, despite the fact that they are engaged in different business activities.
Companies that operate in completely unrelated industries and fields of activity will join together only when it’s profitable for shareholders. To be more precise, when it influences shareholder value, commercial effectiveness and when it leads to cost reduction.
Congeneric. It is the type of merger of two companies that operate in the same or related industries with similar factors, such as technology, marketing, etc. Congeneric merger describes the process when a new product line of one organization is launched in another company. When merging, they provide one group of customers with products or services but they don’t compete with each other. That’s how two businesses can expand the target audience.
Market extension. There are businesses that sell similar goods but operate in different markets. If they strive to expand the market, they can come together to form a new entity. By doing this, they can reach larger markets and attract more customers.
Horizontal. This type of merger occurs when two companies engaged in the same industry start to operate as a single entity. Merger of direct competitors producing identical products is common in areas with fewer companies. As a result, a new entity is formed, which has more opportunities for development, a broader economic structure, and a larger market share. Horizontal mergers lead to reduced competition in the market.
Vertical. Vertical mergers take place when the companies act as a supplier and a manufacturer. It means that one company can be a supplier of raw materials or parts for another organization. Consequently, the company that acts as a manufacturer, uses this raw material to produce goods. The goal of it is to increase synergies by reducing costs and expenses.
Real example
Anheuser-Busch InBev (BUD) is a multinational brewing company and the world’s largest beer company that serves as an excellent example of how companies join together. This company entered the market after multiple mergers.
The corporation was created on November 18, 2008 as a result of the combination of two organizations – the American Anheuser-Busch and the Belgian-Brazilian InBev. InBev was a consolidation of two firms as well. In 2004, the Belgian company Interbrew, which owned numerous brewing assets in Europe, and the Brazilian company AmBev merged.
The case is evaluated as a horizontal merger and a market extension because these companies operated in the same industries and they were able to increase the customer base and the market share.
