Mergers

What is a merger?

A merger is a business strategy that involves combining with another company and operating as a single legal entity. Companies that agree to merge are generally equal in size and scale of operations.

Types of mergers

1. Merger of competitors and product extensions

Such mergers occur between companies operating in the same market. The merger results in the addition of a new product to a company’s existing product line. Through the union, the companies can access a wider customer base and increase their market share.

2. Conglomerate merger

A conglomerate merger is a union of companies engaged in unrelated activities. The union will only occur if it increases shareholder wealth.

3. Merger by market extension

Companies operating in different markets but selling the same products join together to gain access to a larger market and a larger customer base.

4. Horizontal merger

Firms operating in markets where they are fewer in number merge to gain access to a larger market. A horizontal merger is a type of consolidation of companies that sell similar products or services. It results in the elimination of competition, thus achieving economies of scale.

5. Vertical merger

A vertical merger occurs when companies operating in the same industry but at different levels of the supply chain merge. These mergers result in increased synergies, supply chain control, and efficiency.

Benefits of a merger

1. Increases market share

When companies merge, the new company gains a larger market share and a competitive edge.

2. Reduces the cost of operations

Companies can achieve economies of scale, such as buying raw materials in bulk, which can lead to cost reductions. Investment in assets is now spread over a larger production run, resulting in technical savings.

3. Avoids replication

Some companies producing similar products may merge to avoid duplication and eliminate competition. This also results in lower prices for customers.

4. Expands operations into new geographic areas

A company seeking to expand its operations in a certain geographic area may merge with another similar company operating in the same area to start its business.

5. Prevents the closure of an unprofitable business

Mergers can keep a company from going out of business and save many jobs.