Explained: Merger and its types
Mergers can be classified into several types based on the nature of the combining companies and the objectives of the merger.
A merger refers to the combination of two or more companies into a single entity. It is a strategic business decision where two separate companies agree to merge their operations, assets, and liabilities to form a new company or to be absorbed by an existing company. The purpose of a merger is typically to achieve various benefits such as synergies, increased market share, cost savings, economies of scale, diversification, or enhanced competitiveness.
Mergers can be classified into several types based on the nature of the combining companies and the objectives of the merger.
Here are some common types of mergers:
1. Horizontal Merger: A horizontal merger occurs when two companies operating in the same industry and at the same stage of production combine their operations. The aim is to achieve economies of scale, increase market share, or eliminate competition. For example, if two competing banks merge, it would be a horizontal merger.
Example: The merger between Vodafone India and Idea Cellular in 2018. Both companies were major telecom operators in India and merged to create a larger entity, Vodafone Idea Limited, to enhance their market share and competitiveness in the industry.
2. Vertical Merger: In a vertical merger, two companies operating at different stages of the production or supply chain come together. This type of merger aims to streamline operations, improve efficiency, and gain better control over the supply chain. For instance, if a car manufacturer merges with a steel company that supplies raw materials, it would be a vertical merger.
Example: The merger between Hindalco Industries and Novelis Inc. in 2007. Hindalco Industries, an aluminium manufacturing company, acquired Novelis, a global leader in aluminium rolling and recycling. This vertical merger allowed Hindalco to integrate back into the value chain and gain access to Novelis' advanced technology and international market presence.
3. Conglomerate Merger: A conglomerate merger involves the combination of two companies that operate in unrelated industries. This type of merger allows diversification and reduces risk by expanding into different business areas. Conglomerate mergers can be either pure conglomerate mergers, where the companies have no common business areas, or mixed conglomerate mergers, where the merging companies have some overlapping business activities.
Example: The merger between Reliance Industries Limited (RIL) and Network18 Group in 2014. RIL, a conglomerate with interests in various industries, merged with Network18, a media and entertainment company. This merger enabled RIL to expand its presence in the media sector and leverage Network18's media assets.
4. Market Extension Merger: A market extension merger occurs when two companies selling similar products or services in different markets or geographic areas merge. By combining their operations, the merged entity can expand its customer base and reach new markets.
Example: The merger between Bharti Airtel and Tata Teleservices in 2017. Bharti Airtel, one of the largest telecom operators in India, acquired the consumer mobile business of Tata Teleservices. This merger allowed Bharti Airtel to extend its market reach and customer base.
5. Product Extension Merger: In a product extension merger, two companies selling related but complementary products or services merge to offer a broader range of offerings to their customers. This type of merger allows cross-selling and can lead to increased market share and revenue.
Example: The merger between Sun Pharmaceutical Industries and Ranbaxy Laboratories in 2014. Sun Pharmaceutical, a leading Indian pharmaceutical company, acquired Ranbaxy, a prominent pharmaceutical company with a global presence. This merger allowed Sun Pharmaceutical to expand its product portfolio and enhance its market share.
6. Reverse Merger: A reverse merger is a transaction where a privately held company acquires a publicly traded company. By merging with a public company, the private company can become publicly traded without going through the traditional initial public offering (IPO) process.
Example: The reverse merger between Reliance Communications (RCom) and Reliance Telecom Limited (RTL) in 2006. RTL, a subsidiary of RCom, merged with RCom, resulting in RCom becoming a publicly listed company. This reverse merger provided RCom with access to the capital market without going through the traditional IPO process.