What is it called when two companies merge together?

In this section, we look at the most common types of mergers and acquisitions. We also explore some of the pros and cons of each, and help you establish which one might be best suited for executing your own business strategy.

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What are the most common types of mergers and acquisitions?

  • Horizontal merger
  • Vertical merger
  • Congeneric mergers
  • Market-extension or product-extension merger
  • Conglomeration​

Horizontal merger

A horizontal merger occurs when two companies operating in the same market (and selling similar products or services) come together to dominate market share. This type is attractive for merging companies aiming to build economies of scale and decrease market competition. However, there are potential downsides. A horizontal merger comes with increased regulatory scrutiny and stringency, and can lead to a loss of value if the post-merger integration is not fully realized. Regulatory due diligence should be executed with extra special care. 

Vertical merger

Vertical mergers involve two companies in the same industry who operate in different stages of production. This could involve a retailer who merges with a wholesaler, or a wholesaler merging with a manufacturer, for example. This type of merger is ideal for streamlining operations, boosting efficiencies, and cutting costs across the supply chain, but it can also reduce flexibility and result in new complexities for the business to manage.

Congeneric merger (also ‘Concentric merger’)

In a congeneric merger, the acquirer and target company have different products or services, but operate within the same market and sell to the same customers. They could be indirect competitors, although their products often complement each other. As these companies already share similar distribution channels, production or technology, this type of merger can allow the new business entity to expand its product lines and increase market share. As a downside, the fact that these two companies already operate within the same industry could limit further diversification.

Market-extension and product-extension mergers

A market extension merger describes two companies in the same industry who join forces with the aim of expanding market reach. Commonly, this type of transaction occurs across multiple geographic regions. A product extension merger occurs when a specific product is added to the product line of the acquirer from the acquired company.

Conglomerate merger

Unlike the other types of merger, a conglomerate merger occurs between two companies whose business activities and industries may be completely unrelated. In pure conglomerate mergers, the two firms may continue to operate separately within their own markets, whereas in a mixed one, they may look to expand product or market reach. While this type of merger can help the new entity increase market share and diversify its business, it can be especially challenging to integrate dissimilar companies, raising the risk of culture clashes and lost efficiency due to disrupted business operations.

How can you tell which type of merger is right for you?

The right type of merger for you will ultimately depend on your goals and your M&A strategy.

Are you looking to boost market share and decrease your competition? Then a horizontal merger is probably your best option.

Are you looking to streamline your operations and create new efficiencies by integrating with suppliers or wholesalers? A vertical merger will help you achieve this.

Understanding which type of merger or acquisition will best support your strategy requires a careful look at the pros and cons of each, and the support of an expert advisor for guidance before the companies join together.

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Small businesses conduct mergers and acquisitions for the same reasons large corporations do – to strengthen positions in one or more markets, gain access to new markets, increase efficiency or just diversify a company's offerings. There are several types of merger strategies of particular interest to small businesses and each has something to offer depending on your company's goals.

Tip

The three main types of merger are horizontal mergers which increase market share, vertical mergers which exploit existing synergies and concentric mergers which expand the product offering.

Mergers vs. Acquisitions

A discussion about corporate combinations should note that, strictly speaking, true mergers are rare. A merger occurs when two companies come together as equals and form an entirely new company. Many business combinations billed as "mergers" are really one of several types of acquisition. If a company buys another and absorbs its operations, it has completed an acquisition. The distinction is mostly technical, although calling the deal a merger shows deference to and respect for the other company's employees and former owners.

Horizontal Mergers Increase Market Share

Horizontal mergers involve companies that offer the same products or services to the same kinds of customers. If your business mows lawns and you combine with another lawn-care company in your town, that's a horizontal merger example. Horizontal mergers offer "economies of scale," meaning that average costs decline as the company does a greater volume of business. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies: Where the original companies each needed their own purchasing department, advertising budget, benefits program and so on, the merged firm only requires one.

Vertical Mergers Create Synergy

A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. Say you own a manufacturing company that makes items out of plastic. Merging with a company that makes raw plastics would be a vertical merger. Vertical mergers help prevent business disruptions; the manufacturing operation no longer has to worry about obtaining enough plastic, while the plastics operation gets a steady customer. Cost savings through eliminating redundant functions are also possible.

Concentric Mergers Expand Offerings

Concentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but don't offer them the same products or services. If you owned a catering company, for example, and you merged with a business that rents tables, chairs, event tents and party equipment, that would be a concentric merger. Both companies appeal to customers who have events to plan, but not in the same way.

Concentric mergers diversify the combined company's offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business, because the firm becomes more of a "one-stop shop" offering more of the services that both companies' customers are typically looking for.

Conglomerate Mergers: a Fourth Possibility

Although not as common as they were during the 1960s and '70s, a fourth type of merger is the conglomerate merger. In this business move, two companies from different industries or geographic locations join forces. In a pure conglomerate merger, the companies are completely unrelated in their product offerings. In a mixed conglomerate merger, the companies are looking to expand their product offerings or market reach by joining with another company.

One of the advantages of these types of corporate combinations is that the new company now has the ability to reach a wider market by expanding its customer base. The combined company has access to all the customers familiar with products sold by the separate entities and can now market to everyone. However, these mergers are often difficult to pull off effectively as the two unlike entities must function together and adjust their operating processes, business models and corporate cultures.

What is it called when two companies in entirely different industries combine?

A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. These mergers typically occur between firms within different industries or firms located in different geographical locations. There are two types of conglomerate mergers: pure and mixed.

What are the 3 types of mergers?

The three main types of merger are horizontal mergers which increase market share, vertical mergers which exploit existing synergies and concentric mergers which expand the product offering.