A merger is an arrangement in which the financial and other assets of two or more companies are combined or amalgamated. The term “merger,” according to Eugene F. Brigham and Louis C. Gapenski in the book “Test Bank: Financial Management: Theory and Practice,” “implies a combination of two or more formerly independent business units into one organization with a common management and ownership.” Mergers are made for economic objectives (increased liquidity, operating economies, greater managerial skills, growth, diversification, fund raising, income stability and taxation) and personal objectives.
A horizontal merger involves the merger between two or more companies with related or similar product lines. Horizontal mergers, according to Milford B. Green in the book “Mergers and Acquisitions: Geographical and Spatial Perspectives,” lead to the complete elimination of a competitor, increased market share, and increased degree of concentration of the acquiring business in the industry. The two main types of horizontal mergers are market extension mergers and product extension mergers. Market extension mergers are those that involve firms producing the same products but operating in different geographical areas. Product extension mergers involve firms that product similar products.
A vertical merger involves firms that have a current or potential buyer-seller relationship. John B. Taylor and Akila Weerapana in the book “Economics,” define a vertical merger as, “a combination of two firms, one of which supplies goods to the other.” A vertical merger merges a customer and a supplier or a distributor. An example of a vertical merger would be a clothing manufacturer or retailer acquiring a textile mill to guarantee uninterrupted input.
A congeneric merger, also called a concentric merger, is a merger between unrelated or somewhat related firms. An example of a congeneric merger is when an airline acquires a tourism industry-related business or if a newspaper merges with a TV channel. The companies involved in a congeneric merger are typically engaged in complementary, not directly competitive activities. According to Dr. S. Gurusamy in the book “Financial Services, 2E,” congeneric mergers allow the merged companies to achieve financial and operating economies of scale.
A conglomerate merger is between completely unrelated firms. For example, Procter & Gamble Corporation (Pantene, Pringles, Whisper, Always, Pampers, lams, Head & Shoulders and Bounty) extended its line of products in 2004 by merging with Clorox Company, a producer of household-cleaning products and bleach. Conglomerate mergers are typically undertaken to reduce business risks.