What is a Merger?
A merger is a strategic agreement that unites two existing companies into one new entity. This corporate action is primarily performed to expand a company’s reach, diversify into new segments, or gain a larger market share, ultimately aimed at enhancing shareholder value. Often, during a merger, companies include a no-shop clause to prevent additional merger or acquisition offers from other firms.
Key Takeaways
- Mergers facilitate company expansion into new segments or markets.
- A merger is typically a voluntary unification of two companies under broadly equal terms, crafting a new legal entity.
- The five primary types of mergers include conglomerate, congeneric, market extension, horizontal, and vertical mergers.
How a Merger Works
A merger represents the voluntary combination of two entities on nearly equal footing into one new legal company. These companies usually have a similar size, customer base, and operational scale, thus the term ‘merger of equals.’ Unlike acquisitions, which are often non-voluntary and entail one company absorbing another, mergers are mutually beneficial arrangements.
The primary motivations for merging include gaining market share, reducing operational costs, accessing new markets, consolidating products or services, increasing revenue, and ultimately boosting profits. Post-merger, the shares of the new entity are distributed to the existing shareholders from both original companies.
Inspiring Types of Mergers
Depending on their strategic goals, companies opt for different types of mergers. Below are the most common types:
Conglomerate
A conglomerate merger takes place between companies involved in unrelated business activities. Firms may operate in different industries or regions but see value in merging from a shareholder perspective. For instance, when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995, it created a prime example of a conglomerate merger.
Congeneric
Also called a Product Extension merger, a congeneric merger involves companies within the same market or sector that often share technological, marketing, production, or R&D processes. Citigroup’s 1998 merger with Travelers Insurance represents this merger type, allowing access to a broader consumer base and enhanced market share.
Market Extension
Market extension mergers occur between companies selling identical products but operating in different markets. Such mergers enable firms to gain access to larger markets and a bigger client base. A classic example is the 2002 merger of Eagle Bancshares and RBC Centura to broaden their market reach.
Horizontal
A horizontal merger involves companies in the same industry, often rivals combining forces. These mergers aim to create a larger entity with substantial market share and economies of scale. The notable merger of Daimler-Benz and Chrysler in 1998 showcases this type of union.
Vertical
Vertical mergers unite companies operating at different levels within the same industry supply chain, aiming for synergy through cost reductions and operational efficiencies. The 2000 merger of internet provider America Online (AOL) with media conglomerate Time Warner is a famous instance of such a merger.
Real-Life Corporate Mergers
Anheuser-Busch InBev exemplifies strategic merger practices. It emerged from the mergers of international beverage leaders Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States). Combining these enterprises demonstrates both horizontal mergers and market extension, consolidating global market presence.
Historical mega-mergers include Vodafone acquiring Mannesmann for $190 billion in 2000 and Verizon Communications’ $130 billion buyout of Vodafone’s 45% stake in Verizon Wireless in 2014, highlighting how mergers shape the corporate landscape.
Horizontal Merger
A horizontal merger is the combination of competing companies, such as the T-Mobile and Sprint merger.
SPAC Merger
A SPAC (special-purpose acquisition company) executes a merger to raise capital for acquiring an operational company, which becomes publicly listed following the merger.
Reverse Merger
A reverse merger occurs when a private company merges with a publicly traded entity to go public without an IPO, as exhibited by the New York Stock Exchange’s merger with Archipelago Holdings in 2006.
By strategically merging, companies effectively strengthen their market position, achieve cost efficiency, expand product lines, and ultimately add synergistic value to shareholders.
Related Terms: acquisitions, market share, shareholder value, synergy.
References
- White & Case. “US M&A Roars Into 2022 on the Momentum of a Record-Shattering Year, But Challenges Loom, According to a New Report by White & Case and Mergermarket”.
- D23. “American Broadcasting Company”.
- Federal Reserve. “Federal Reserve Press Release”, Page 1.
- U.S. Securities and Exchange Commission. “RBC Centura to Acquire Eagle Bancshares, Inc”.
- Mercedes-Benz Group. “1995 – 2007. World Corp. Vision”.
- U.S. Government Printing Office. “AOL & Time Warner Merger”.
- Anheuser-Busch InBev. “2021 Annual Report”, Page 189.
- Anheuser-Busch InBev. “Our Heritage”.
- Goldman Sachs. “Vodafone Acquires Mannesmann in the Largest Acquisition in History”.
- U.S. Securities and Exchange Commission. “Schedule 14D-9: AOL Inc”.
- Verizon. “Verizon Completes Acquisition of Vodafone’s 45 Percent Indirect Interest in Verizon Wireless”.
