What are Mergers? What are different types of Mergers?

Merger refers to the process whereby at least two companies combine to form one single company. 

• Mergers help firms to consolidate market and to gain competitive edge. 
• A financial tool used for enhancing long term profitability by expanding their operations. 
• Merger occurs when there is mutual consent between merging firms. 
• Merger or amalgamation may take two forms: 
  • Absorption – merging of two or more companies into an existing company. 
  • Consolidation – merging of two or more companies into a new company. 

• In a merger there is complete amalgamation of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies. 

Types of Mergers

1. Horizontal
   • Merger between companies competing in the same line of business activities. 
   • Number of firms in an industry gets reduced – may lead to monopoly. 
   • Regulated by governments to control their negative effect on competition. 
   • Eg: Bank of Rajasthan with ICICI Bank
   • Eg: ACC cement with Damodar cement
2. Vertical 
   • Merger between firms producing different goods or services for specific finished goods. 
   • Results in cost reduction (transportation etc)
   • Two types: 
     • Backward vertical merger – TATA tea with tea gardens in Assam. 
     • Forward vertical merger – oil companies buying up service stations.
3. Concentric
   • Two firms merge to share some common expertise that may become mutually advantageous. (managerial, technology etc).
4. Conglomerate
   • Merger between firms that are involved in totally unrelated business activities.  
   • Two types: 
     • Pure 
     • Mixed
   • Main reasons – synergy, increasing market share, cross selling, to diversify, to reduce risk exposure etc.