Mergers and acquisitions are the ways in which businesses get combined. They can be a little intricate to understand all the legal and tax issues surrounding the deals. Mergers and acquisitions are two different business combinations, although they are thought of as a generic term. Let us look at the types of mergers and acquisitions and the ways the companies can do business combinations.
Definition of Merger
A merger is a business transaction where an acquiring company takeovers the target company as a whole. This results in only one company remaining after the merger. The smaller target company loses its existence and becomes a part of the bigger acquiring company.
- Definition of Merger
- Basis of Classifications / Types of Mergers:
- Integration Form
- Relatedness of Business Activities
- Other Classifications:
Basis of Classifications / Types of Mergers:
Mergers can be differentiated into various types depending on the following:
Mergers can be classified depending on how both the companies physically combine themselves in the transaction to form one entity.
The mergers can be classified as follows on the basis of forms of integration:
A statutory merger is one in which all the assets and liabilities of the smaller company are acquired by, the bigger (acquiring) company. As a result, the smaller target company loses its existence as a separate entity.
Company A + Company B = Company A
A subsidiary merger is when the target company becomes a subsidiary of the bigger acquiring company. This happens because the target company may have a known brand or a strong image that would make sense for the acquiring company to retain.
Company A + Company B = (Company A + Company B)
A consolidation merger is one in which both the companies lose their identity as separate entities and become a part of a bigger new company. This is generally the case with both the companies being of the same size.
Company A + Company B = Company C
Relatedness of Business Activities
Mergers can be classified depending on how both companies’ business activities relate to each other. The economic function and the purpose of the transaction define the types of mergers.
The mergers can be classified as follows on the basis of the relatedness of the business activities:
A merger that happens between companies belonging to the same industry. The companies have businesses in the same space and are generally competitors to each other. A horizontal merger is a feature of an industry that consists of a large number of small firms / fragmented industries. The level of competition is high, and the post-merger synergies and gains are much higher for companies in such industries. The motivation behind such a merger is economies of scale and control of a bigger market share.
A vertical merger is a merger between companies that produce different goods or offer different services for one common finished product. The companies operate at different levels in the supply chain of the same industry. The motivation behind such mergers is cost efficiency, operational efficiency, increased margins, and more control over the production or the distribution process. There are two types of vertical mergers:
- Backward Integration: A vertical integration where a company acquires the suppliers of its raw materials.
- Forward Integration: A vertical integration where a company acquires the distribution channels of its products.
Must read: Horizontal vs. Vertical Integration.
A merger between companies that operate in completely different and unrelated industries. A pure conglomerate merger is between companies with totally nothing in common. A mixed conglomerate merger is between companies looking for a market or product extensions.
Market Extension Mergers
A merger between companies that have the same products to offer but the markets are different. The reason behind such mergers is access to bigger markets and an increase in client base.
Product Extension Mergers
A merger between companies that have different but related products but the markets are the same. Such mergers allow the companies to bundle their product offerings and approach more consumers. This type of merger is also known as a congeneric merger or concentric merger.
Besides the above classifications, there are other characteristics of the deals. Also, that may further define the types of mergers:
Complementary or Supplementary Merger
A complementary merger aims at compensating for some limitations of the acquiring company. The acquisition of the target company may be an attempt to strengthen a ‘process’ or enter a new market. A supplementary merger is one in which the target company further strengthens the acquiring company. The target may be similar to the acquiring company in this case.
Hostile or Friendly Merger
A merger can be hostile or friendly depending on the approval of its directors. If the company’s board of directors and managers are against the merger, it is a hostile merger. If they approve the merger, it is a friendly merger.
Arm’s Length Merger
This type of merger is a merger that is approved both by the disinterested directors and the disinterested stockholders.
A merger of a target company with an aim of strategic holding over a longer-term. An acquirer may pay a premium to target in this case.
In a reverse merger, a private company acquires a public company to prevent itself from the complex process of going public.
A business combination gets complex not only with the legal issues but also with the type of a merger. A merger can vary according to the way companies come together or their economic functions. It is important to understand the type of merger to appreciate the intricacies involved.