Chapter 10 - 2

02 Business

Types of Business Mergers

When companies want to expand their operations in an attempt to create long-term profitability, they often rely on mergers.

A merger is a form of corporate restructuring that occurs when two or more companies combine to form a single entity.

There are three types of mergers: horizontal, vertical, and conglomerate.

Horizontal mergers occur. when companies in the same industry combine.

This is done in order to expand product lines, reduce costs, or eliminate competition.

Horizontal mergers can have either an insignificant or considerable impact on a particular industry depending on the sizes of the companies merging.

If two small, local grocery stores merge together, there will likely be no effect on the market as a whole.

On the other hand, mergers between companies with large shares of the market can significantly change the industry so much that such mergers are often blocked.

For example, the US government prevented a merger between two major US office supply chains after finding that the merger would have given the new company an unfair advantage over its competitors, allowing the company to raise prices by as much as thirteen percent.

Another type of merger is the vertical merger, in which a company purchases another company that is involved in a different stage of the sales or production process.

This cuts costs since the company that supplies the materials and the company that produces and distributes products are now one organization.

For instance, if a publishing house buys a paper company, the publishing house can reduce its expenditures on paper.

The publishing house can purchase paper at base cost, so there is less money tied up in the production process.

Vertical mergers can negatively affect competition; materials may be harder to obtain or more expensive to purchase since a rival company now owns the material manufacturing company.

In a conglomerate merger, companies in different markets combine.

The companies operate in separate industries and by merging, there is little effect on competition in either market.

For example, a clothing company might merge with a soft drink company.

If the soft drink market goes down, the soft drink side of the company may lose profit.

However, if the clothing market is good, the clothing side of the company might be able to make up for the losses sustained by the soft drinks.

Conglomerate mergers are often done as a way to reduce risk and create a more stable pattern of sales, since the company’s capacity for profit is not concentrated in one specific market.

Companies initiate mergers for a number of different reasons.

Each type of merger can save on costs by allowing merged companies to reduce the number of employees if positions overlap.

Instead of having two marketing directors, one at each company, a single marketing director will suffice for the newly formed company.

Business mergers can help expanding companies grow at a rapid rate without having to put in the money and time to create another company from the ground up.