Merger: Types of mergers
This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or in different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger.
Companies with no overlapping factors will only merge if it makes sense from a shareholder wealth perspective, that is, if the companies can create synergy. A conglomerate was formed when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995.
A congeneric merger is also known as a Product Extension merger. In this type, it is a combining of two or more companies that operate in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D). A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company. When two companies become one under a product extension, they are able to gain access to a larger group of consumers and, thus, a larger market share. An example of a congeneric merger is Citigroup’s 1998 union with Travelers Insurance, two companies with complementing products.
This type of merger occurs between companies that sell the same products but compete in different markets. Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base. To extend their markets, Eagle Bancshares and RBC Centura merged in 2002.
It’s occurs between companies operating in the same industry. The merger is typically part of consolidation between two or more competitors offering the same products or services. Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale since competition among fewer companies tends to be higher. The 1998 merger of Daimler-Benz and Chrysler is considered a horizontal merger.
When two companies that produce parts or services for a product merger the union is referred to as a vertical merger. A vertical merger occurs when two companies operating at different levels within the same industry’s supply chain combine their operations. Such mergers are done to increase synergies achieved through the cost reduction which results from merging with one or more supply companies. One of the most well-known examples of a vertical merger took place in 2000 when internet provider America Online (AOL) combined with media conglomerate Time Warner.
Example of a Merger
Anheuser-Busch InBev is an example of how mergers work and unite companies together. The company is the result of multiple mergers, consolidation, and market extensions in the beer market. The newly named company, Anheuser-Busch InBev, is the result of the mergers of three large international beverage companies—Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States).
Ambev merged with Interbrew uniting the number three and five largest brewers in the world. When Ambev and Anheuser-Busch merged, it united the number one and two largest brewers in the world. This example represents both horizontal merger and market extension as it was industry consolidation but also extended the international reach of all the combined company’s brands.
The largest mergers in history have totaled over $100 billion each. In 2000, Vodafone acquired Mannesmann for $181 billion to create the world’s largest mobile telecommunications company. Same year, AOL and Time Warner vertically merged in a $164 million deal considered one of the biggest flops ever. In 2014, Verizon Communications bought out Vodafone’s 45% stake in Vodafone Wireless for $130 billion.