Combine two or more firms involved in different stages of producing the same good or service

Different types of M&A in the corporate world

What is a Merger?

A merger refers to an agreement in which two companies join together to form one company. In other words, a merger is the combination of two companies into a single legal entity. In this article, we will look at different types of mergers that companies can undergo.

Types of Mergers

There are five basic categories or types of mergers:

1. Horizontal merger: A merger between companies that are in direct competition with each other in terms of product lines and markets
2. Vertical merger: A merger between companies that are along the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
3. Market-extension merger: A merger between companies in different markets that sell similar products or services
4. Product-extension merger: A merger between companies in the same markets that sell different but related products or services
5. Conglomerate merger: A merger between companies in unrelated business activities (e.g., a  clothing company buys a software company)

Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course.

Horizontal Mergers

A horizontal merger is a merger between companies that directly compete with each other. Horizontal mergers are done to increase market power (market share), further utilize economies of scale, and exploit merger synergies.

A famous example of a horizontal merger was that between HP (Hewlett-Packard) and Compaq in 2011. The successful merger between these two companies created a global technology leader valued at over US$87 billion.

Vertical Mergers

A vertical merger is a merger between companies that operate along the same supply chain. A vertical merger is the combination of companies along the production and distribution process of a business. The rationale behind a vertical merger includes higher quality control, better flow of information along the supply chain, and merger synergies.

A notable vertical merger happened between America Online and Time Warner in 2000. The merger was considered a vertical merger due to each company’s different operations in the supply chain – Time Warner supplied information through CNN and Time Magazine while AOL distributed information through the internet.

Market-Extension Mergers

A market-extension merger is a merger between companies that sell the same products or services but that operate in different markets. The goal of a market-extension merger is to gain access to a larger market and thus a bigger client/customer base.

For example, RBC Centura’s merger with Eagle Bancshares Inc. in 2002 was a market-extension merger that helped RBC with its growing operations in the North American market. Eagle Bancshares owned Tucker Federal Bank, one of the biggest banks in Atlanta, with over 250 workers and $1.1 billion in assets.

Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course.

Product-Extension Mergers

A product-extension merger is a merger between companies that sell related products or services and that operate in the same market. By employing a product-extension merger, the merged company is able to group their products together and gain access to more consumers. It is important to note that the products and services of both companies are not the same, but they are related. The key is that they utilize similar distribution channels and common, or related, production processions or supply chains.

For example, the merger between Mobilink Telecom Inc. and Broadcom is a product-extension merger. The two companies both operate in the electronics industry and the resulting merger allowed the companies to combine technologies. The merger enabled the combination of Mobilink’s 2G and 2.5G technologies with Broadcom’s 802.11, Bluetooth, and DSP products. Therefore, the two companies are able to sell products that complement each other.

Learn about modeling different types of mergers in CFI’s M&A Financial Modeling Course.

Conglomerate Mergers

A conglomerate merger is a merger between companies that are totally unrelated. There are two types of a conglomerate merger: pure and mixed.

• A pure conglomerate merger involves companies that are totally unrelated and that operate in distinct markets.
• A mixed conglomerate merger involves companies that are looking to expand product lines or target markets.

The biggest risk in a conglomerate merger is the immediate shift in business operations resulting from the merger, as the two companies operate in completely different markets and offer unrelated products/services.

For example, the merger between Walt Disney Company and the American Broadcasting Company (ABC) was a conglomerate merger. Walt Disney Company is an entertainment company, while American Broadcasting company is a US commercial broadcast television network (media and news company).

More Resources

Thank you for reading CFI’s guide to Types of Mergers. To learn more and expand your career, explore the additional relevant CFI resources below:

• Amalgamation
• Consolidation Method
• Mergers and Acquisition Process
• Merger Consequences Analysis