In corporate news, we do keep hearing about merging of companies. Recently, we heard about Kotak Mahindra Bank and ING Vysya. Now, let us understand what is a merger and why do companies merge.
Merger is when two or more companies choose to merge into a single company to expand their business operation and in a aim to increase profit. Merging terms are on friendly terms and both the companies share equal profits in the newly created entity.
Mergers are broadly classified into:
Horizontal merger is when two companies that are into the same products or services merger in order to reduces the level of competition within the industry.
Mergers happening between companies in different industries orsectors. Such that the companies are in different points in the value chain. Say for example, a supplier and customer.
When the supplier acquires the customer, it is an example of forward integration.
When the customer acquires the supplier, it is an example of backward integration.
Conglomerate or Diagonal merger
This type of merger is where the merging companies are neither into the same products or services, nor in the same business. It may be part of the diversify cation strategy of the amalgamated company.
Usually, in a merger, a smaller or weak company merges into a larger or healthier company.
When the reverse happens that is if a larger or healthier company merges into a smaller or weaker company, it is called a reverse merger.
Why Do Companies Merge?
Companies prefer to merger to reduce the risk of entering into a new market place. Companies wanting to expand into different markets, to make a stand in a different country would be difficult, so the companies may just prefer to merge with the other company.
Companies may come together or combine products and services with a aim to be ahead of other competitors in the marketplace.
When two companies have similar products or services, combining can create a large opportunity to reduce costs.
There may be other reasons such as an increase in sales revenue and market share, increase in tax efficiency and widened diversification after merging.