Types of Mergers: Definition, Categories, How They Work

When two companies come together, they can do so in a variety of ways. The type of merger will be dependent on the goals that each company has and what they hope to achieve by coming together.

Mergers are basically an agreement that two companies make which allows them to become one company. This can be done through either an acquisition or a consolidation. The type of merger will generally dictate how the new company will be structured and operated.

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What are mergers?

A merger is an agreement between two companies to combine their operations into a single entity. The merged company will possess the assets and liabilities of both firms, and the ownership of the new company will be divided among the shareholders of the original firms according to their equity stake.

There are several different types of mergers that can occur between companies, each with its own benefits and drawbacks.

Understanding mergers

The first step in understanding mergers is to understand what they are designed to do. Mergers are a type of corporate restructuring in which two companies combine to form a new company. The new company is typically larger than either of the two individual companies and has a different business model or purpose.

Both companies involved in the merger must agree to the terms of the deal and sign off on it. If one company doesn’t want to be acquired, the deal is considered hostile. Once the deal is complete, the two companies are combined into a single entity.

Different types of mergers

There are mainly 5 types of mergers

  1. Horizontal Merger

This is the most common type of merger, where two companies that are in the same business or offer similar products/services join forces. The purpose of a horizontal merger is to increase market share, expand the customer base, and achieve economies of scale.

  1. Vertical Merger

A vertical merger is one in which two companies at different stages of the same supply chain join forces. The purpose of a vertical merger is to achieve greater efficiency and economies of scale.

  1. Conglomerate Merger

A conglomerate merger is one in which two companies that are in unrelated businesses join forces. The purpose of a conglomerate merger is to diversify the business, reducing dependence on any one particular product or market.

  1. Product-extension merger

A product-extension merger is one in which a company that makes a product joins forces with a company that sells a complementary product. The purpose of a product-extension merger is to increase market share and achieve economies of scale.

  1. Market-extension merger

A market-extension merger is one in which a company that sells a product in one market joins forces with a company that sells the same product in another market. The purpose of a market-extension merger is to increase market share and achieve economies of scale.

Conclusion

Mergers are an important part of the business world and can be a great way for companies to grow and expand. It’s important to understand the different types of mergers so that you can choose the right one for your company. Understanding the different types of mergers will help businesses to make the best decision for their company.

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