Economic conditions and market changes can force companies to merge. By merging, companies can stay in business and gain market share. There are five types of business combinations referred to as mergers. They are: vertical merger, horizontal merger, product extension merger, market extension merger, and conglomerate merger. Defining the type of merger depends on the purpose of the business transaction and the relationship between the merging companies.
A vertical merger is between two companies producing different goods or services for one specific finished product. This type of merger happens when companies in an industry’s supply chain merge operations.
An example of a vertical merger is an auto manufacturing company merging with a parts supplier.
A horizontal merger is between companies in the same industry. This type of merger happens when companies that offer the same goods or services merge operations. They are common in industries with fewer firms.
If Coca-Cola and Pepsi were to merge, this would be an example of a horizontal merger.
A product extension merger is between two business organizations which deal in products that are related to each other and operate in the same market. This type of merger allows merging companies to group their products together and gain access to more consumers.
Broadcam’s acquisition of Mobilink Telecom, Inc. is an example of a products extension merger. Broadcam manufactures Bluetooth personal area network hardware systems and chips for wireless LAN. Mobillink manufactures product designs meant for handsets that are equipped with Global System for Mobil Communications technology. Mobilink’s products complement Broadcom’s products.
A market extension merger is between two companies which deal in the same products but separate markets. Market extension mergers allow merging companies to gain access to a bigger market share and a larger client base.
RBC Centura’s acquisition of Eagle Bancshares, Inc. is an example of a market extension merger. Eagle Bancshares holds the Tucker Federal Bank in Atlanta, which in terms of market share, is the one of the ten biggest banks in the area.
A conglomerate merger is between two companies involved in totally unrelated business activities. Pure and mixed are two types of conglomerate mergers. Pure conglomerate mergers are between companies that have nothing in common. Mixed conglomerate mergers are between companies that are looking for product extensions or market extensions.
The merger between the Walt Disney Company and American Broadcasting Company is an example of a conglomerate merger.
Call us today for more information or contact us for a free business review.