A Brief Guide to Mergers
Although we are told that the economic crisis is behind us, the reality is that it really hasn’t stabilized yet and it probably never will. Within economy, there are always major ups and downs and even the biggest companies have to deal with this. It is only those who are committed to surviving that tend to make it. They have to find ways to survive, which is generally through either swift or gradual progress. One popular way of advancing is for multiple businesses to ‘merge’. Local mergers happen on an almost daily basis and these don’t tend to have much of an effect. In fact, consumers often don’t even notice them. However, when there are national or even international mergers, the effect can be noticed by the entire economy of a region or even country.
Why Do Companies Merge?
As clearly explained by Generational Equity – Mergers, there are a number of common reasons for businesses to merge. Because of the variety of reasons, there are also a variety of types of mergers. They are:
- Horizontal mergers, whereby two companies that are in competition with each other join forces to become one large company. In this case, both companies had the same product or service and were targeting the same market, meaning they were each other’s direct competition. A merger of this type can have huge consequences, as there is a possibility that the newly formed company creates a monopoly, allowing them to escalate their prices as they see fit. This is why the Federal Trade Commission exists. They keep a close eye on the market and make sure that the interest of the consumer is upheld at all times. They may even halt a merger if they believe it would lead to unfair trading.
- Vertical mergers, whereby a company that supplies products and a company that distributes them merge. This type of merger is anti-competitive and can actually tremendously benefit both the companies. Because a distributor no longer has to pay for the costs of manufacturing its supplies, the product becomes available at base price, leading to a significant cost saving. A lot of competition does get ruled out of the market through vertical mergers as well.
- Market extension mergers, where companies that sell the same product or service by target different markets join forces. This means the market for both companies is enhanced, since they now act together as one.
- Product extension mergers. These are slightly harder to understand. Say, for instance, one company produces vehicles and another companies produces engine parts. They are therefore two different companies with different products, but they actually sell the same product and target the same market. When they merge, they both receive a boost in sales.
- Conglomeration, which is a type of merger whereby the companies that join up have no similarities whatsoever in their products or services but still decide to join up together, effectively expanding on their overall reach on the market.