Merger: Definition, How It Works With Types and Examples (2024)

What Is a Merger?

A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and reasons companies complete mergers. are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to increase shareholder value. Often, during a merger, companies have a no-shop clause to prevent purchases or mergers by additional companies.

How a Merger Works

A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, and scale of operations. For this reason, the term "merger of equals" is sometimes used. Acquisitions, unlike mergers, are generally not voluntary and involve one company actively purchasing another.

Mergers are most commonly done to gain market share, reduce operational costs, expand to new territories, unite common products, grow revenues, and increase profits—all of which should benefit the firms' shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses.

Types of Mergers

There are various types of mergers, depending on the companies' goals. Companies in the technology, healthcare, retail, and financial sectors will frequently merge. Here are some of the most common types of mergers.

Conglomerate

This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger.

Companies with no overlapping factors will only merge if it makes sense from a shareholder wealth perspective, that is, if the companies can create synergy, which includes enhancing value, performance, and cost savings. A conglomerate merger was formed when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995.

Congeneric

A congeneric merger is also known as a Product Extension merger. This type combines two or more companies operating in the same market or sector with overlapping factors, such as technology, marketing, production processes, and . A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company. When two companies become one under a product extension, they can gain access to a larger group of consumers and, thus, a larger market share. An example of a congeneric merger is Citigroup's 1998 union with Travelers Insurance, two companies with complementing products.

Market Extension

This type of merger occurs between companies that sell the same products but compete in different markets. Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base. For instance, to extend their markets, Eagle Bancshares and RBC Centura merged in 2002.

Horizontal

A horizontal merger occurs between companies operating in the same industry. The merger is typically part of consolidation between two or more competitors offering the same products or services. Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale since competition among fewer companies tends to be higher. The 1998 merger of Daimler-Benz and Chrysler is considered a horizontal merger.

Vertical

When two companies that produce parts or services for a product merger, the union is referred to as a vertical merger. A vertical merger occurs when two companies operating at different levels within the same industry's supply chain combine their operations. Such mergers are done to increase synergies achieved through cost reduction, which results from merging with one or more supply companies. One of the most well-known examples of a vertical merger occurred in 2000 when internet provider America Online (AOL) combined with media conglomerate Time Warner.

Examples of Mergers

Anheuser-Busch InBev (BUD) is an example of how mergers work and unite companies together. The company is the result of multiple mergers, consolidations, and market extensions in the beer market. The renamed company, Anheuser-Busch InBev, is the result of the mergers of three large international beverage companies—Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States).

Ambev merged with Interbrew, uniting the world's third and fifth-largest brewers. When Ambev and Anheuser-Busch merged, it united the number one and two largest brewers in the world. This example represents both horizontal merger and market extension as it was an industry consolidation and extended the international reach of all the combined company's brands.

The largest mergers in history have totaled over $100 billion each. In 2000, Vodafone acquired Mannesmann, a transaction valued at $190 billion, to create the world's largest mobile telecommunications company. In 2000, AOL and Time Warner vertically merged in a $164 billion deal considered one of the biggest flops ever. In 2014, Verizon Communications bought out Vodafone's 45% stake in Vodafone Wireless, the value of which was $130 billion.

The Bottom Line

Mergers occur when two or more companies combine to make one larger one. They are usually strategic in nature for one or both businesses, granting them both larger market share or other advantages.