Mergers appear in three forms, based on the competitive relationships between the merging parties.
1) Horizontal Merger
Horizontal mergers occur when two companies sell similar products to the same markets. 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.
Horizontal mergers raise three basic competitive problems. The first is the elimination of competition between the merging firms, which, depending on their size, could be significant.
The second is that the unification of the merging firms’ operations might create substantial market power and might enable the merged entity to raise prices by reducing output unilaterally.
The third problem is that, by increasing concentration in the relevant market, the transaction might strengthen the ability of the market’s remaining participants to coordinate their pricing and output decisions.
The fear is not that the entities will engage in secret collaboration but that the reduction in the number of industry members will enhance tacit coordination of behavior.
2) Vertical Merger
A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. Vertical mergers take two basic forms: forward integration, by which a firm buys a customer, and backward integration, by which a firm acquires a supplier.
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Replacing market exchanges with internal transfers can offer at least two major benefits. First, the vertical merger internalizes all transactions between a manufacturer and its supplier or dealer, thus converting a potentially adversarial relationship into something more like a partnership.
Second, internalization can give management more effective ways to monitor and improve performance.
Vertical integration by merger does not reduce the total number of economic entities operating at one level of the market, but it might change patterns of industry behavior.
Whether a forward or backward integration, the newly acquired firm may decide to deal only with the acquiring firm, thereby altering competition among the acquiring firm’s suppliers, customers, or competitors.
Suppliers may lose a market for their goods; retail outlets may be deprived of supplies; or competitors may find that both supplies and outlets are blocked. These possibilities raise the concern that vertical integration will foreclose competitors by limiting their access to sources of supply or to customers.
Vertical mergers also may be anticompetitive because their entrenched market power may impede new businesses from entering the market.
3) Conglomerate Mergers
Conglomerate mergers occur when two organizations sell products in completely different markets. There may be little or no synergy between their product lines or areas of business.
The benefit of a conglomerate merger is that the new, parent organization gains diversity in its business portfolio. Conglomerate transactions take many forms, ranging from short-term joint ventures to complete mergers.
Whether a conglomerate merger is pure, geographical, or a product-line extension, it involves firms that operate in separate markets. Therefore, a conglomerate transaction ordinarily has no direct effect on competition.
There is no reduction or other change in the number of firms in either the acquiring or acquired firm’s market. Conglomerate mergers can supply a market or “demand” for firms, thus giving entrepreneurs liquidity at an open market price and with a key inducement to form new enterprises.
The threat of takeover might force existing managers to increase efficiency in competitive markets. Conglomerate mergers also provide opportunities for firms to reduce capital costs and overhead and to achieve other efficiencies.
Motives for Mergers and Acquisitions in Business
Mergers and acquisitions are resorted to by the corporate entities due to more than one reason. Some of the significant motives for mergers include the following:
- Diversification of risk
- Financial synergy
- Building Empire
M&A and restructuring commonly occur together, and can bleed into one another, as well as other, unusual but less dramatic business decisions:
In conclusion, the essential strategic rationale behind mergers and acquisition is what companies hope to achieve the various drivers behind strategic mergers establishing and maintaining strategic focus.
The main difference between a merger and an acquisition lies in the way in which the combination of the two companies is brought about. In a merger there is usually a process of negotiation involved between the two companies prior to the combination taking place.
In an acquisition the negotiation process does not necessarily take place. In an acquisition company A buys company B. Company B becomes wholly owned by company A.