The different types of company mergers

Many Illinois residents may be familiar with the business term company merger but have little knowledge regarding the different types of these mergers. In essence, there are five: conglomerate merger, horizontal merger, vertical merger, market-extension merger and product-extension merger. Each type denotes a specific economic function, purpose for coming together and relationship shared by the combining entities.

Most company mergers involve businesses that are related through the product they produce, the industry in which they work or the consumers that they serve. However, a conglomerate merger connects businesses that function in completely different market sectors. The main reasons for a conglomerate merger are to reach a larger consumer base and to increase synergies within an industry.

Closely related merger types are the market- and product-extension mergers. The market-extension merger is typically used to increase access to a larger market share, which often equates to a larger consumer base. A product-extension merger typically takes place between two competitors working with the same product and in the same market. This type of merger allows the companies to pool resources and potentially earn more profit.

A horizontal merger also brings together two businesses that function closely in the same market and industry, typically as competitors. Consolidating their resources and clout, companies that engage in this type of merger seek to heighten their influence in industries without a wide variety of firms. The vertical merger combines companies that work in the same supply chain but not necessarily as competitors. This type of merger is usually exercised by companies that wish to streamline supply and demand logistics.

The laws pertaining to mergers can often be dense, arcane and difficult to navigate. Yet, companies must merge within the parameters of the law or risk severe, devastating penalties. For this reason, most companies lean on the counsel and guidance of a business and commercial law attorney when attempting to alter their business formation, such as through a merger.

Source: MBDA, "5 Types of Company Mergers", November 03, 2014

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