Company mergers explained

Written by: BUSINESS

Company mergers explained: What are they and how do they work?

This article discusses the ins and outs of company mergers, the types of mergers and reasons why a business would use them. Here are a few of the most important things to consider when exploring different company mergers.

What is a company merger?

A company merger is where two companies join to form a new company. Companies might choose to merge to expand their market share, reduce risk and competition, and increase the amount of profits which they make. The new company will then share one combined stock.

It’s often considered that a merger would be a 50/50 split where each side of the company maintains half of the new company, but that isn’t always the case. Some mergers mean that one of the companies ends up with a larger percentage of ownership of the new company than the other, depending on the deal made.

What are the different types of company mergers?

The merger type is usually based on the type of industry and the business relationship that exists between the two companies that are to merge. There are 5 main types of mergers.

What are they and how do they work

  • Conglomerate merger

This is where the two companies that combine are from different industries and have unrelated business activities. Some companies choose to do a conglomerate merger as a way of diversifying their business and cross selling their products to a wider audience.

  • Horizontal merger

A horizontal merger is where two companies of the same industry come together. This could be direct or indirect competitors, meaning that there would be less competition and a larger audience reach as well as a stronger buying power.

  • Vertical merger

Vertical mergers are when two companies that operate in different areas of the same supply chain merge together to produce different goods/services for the same final product. For example, one of the companies sells something to the other company acting as a supplier. This type of merger will have a more efficient supply chain and lower costs along with a tighter product control.

  • Market extension merger

A market extension merger is like a horizontal merger in the sense that it’s the combining of two companies from the same industry. However, the two companies are from separate markets, so the aim of this merger is to increase market share.

  • Product extension merger

This merger can also be known as a congeneric merger and is the combination of two companies selling similar products that aren’t necessarily in competition with one another. Likewise, this type of merger increases the new company’s profits and expands the customer reach as it will combine both company’s customers.

This type of merger is common in the software trading industry. For example, one company might sell virus protection software, whereas the other sells financial protection software – both of which would work well in conjunction with one another.

Things to do before you merge

Before merging your company with another, you must carefully research the outcome together. Think about all of the possibilities that could happen with merging and write down the pros and cons that come with it.

You’ll also want to consider your options with restructuring and speak to a specialist about it. It’s important to know all of the legalities of restructuring your business before you enter the commitment and make sure you feel comfortable with the changes ahead.

Last modified: March 30, 2021