What is a Circular Merger
A circular merger is a transaction to combine companies that operate within the same general market, but offer a different product mix. A company engages in a circular merger to offer a greater range of products or services within their market. Companies also pursue circular mergers to share common distribution and research facilities and promoting market enlargement. The acquiring company benefits by economies of resource sharing and diversification.
A circular merger is one of the three types of mergers. The other two types are vertical, a merger between two companies that operate at separate stages of the production process for a specific finished product, and horizontal mergers. Horizontal mergers are mergers or business consolidations between firms operating in the same space, as competition tends to be higher and as a result, the synergies and potential gains in market share are much greater for merging firms.
BREAKING DOWN Circular Merger
A circular merger can be risky if the acquiring company does not have specific expertise within the targeted market segment. Sometimes, expanding offerings too far from the company's expertise can lead to greater inefficiency, rather than the economies of scale that are often hoped for. However, the acquiring company can benefit from economies of scale and the sharing of distribution channels.
Example of a Circular Merger
An example of a circular merger is the joint venture formed in 2017 between McLeod Russel, one of the world’s largest tea plantation companies, with Eveready Industries India Ltd, a battery and flashlight manufacturer. Both McLeod Russel Eveready belong to the Williamson Magor Group, controlled by the Khaitan family. The two companies formed a 50-50 joint venture to boost Eveready’s retail packet tea business, which includes a few brands. Eveready had concluded that its tea brands were suffering from neglect because of the company's main focus was on its battery and flashlight products. McLeod Russel has been a pure plantation company and was interested in entering the retail tea business.
The companies hoped that this arrangement would help develop the group’s packet tea business with the two firms combining Eveready's marketing and distribution know-how with McLeod Russel's tea plantation knowledge. Executives at Eveready stated in a press release that its packet tea business “was not receiving adequate attention and focus due to the company’s other priorities.” The packet tea market in India is estimated at Rs10,000 crore, or $1.5 billion, according to Eveready.