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 also several reasons why companies complete mergers. Mergers and acquisitions (M&A) 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.
- Mergers are a way for companies to expand their reach, expand into new segments, or gain market share.
- A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.
- The five major types of mergers are conglomerate, congeneric, market extension, horizontal, and vertical.
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, or generally not voluntary and involve one company actively purchasing another.
Mergers are most commonly done to gain market share, reduce costs of operations, 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.
Due to a large number of mergers, a mutual fund was created, giving investors a chance to profit from merger deals—called The Merger Fund from Virtus Investment Partners. The fund captures the spread or amount left between the offer price and trading price. It invests in companies that have publicly announced a merger or takeover. he fund has returned 5.8% annually since its inception in 1989 (as of 3/31/2022).
The total value of mergers and acquisitions for 2022 rose to $2.6 trillion.
Types of Mergers
There are various types of mergers, depending on the goal of the companies involved. Below are some of the most common types of mergers.
This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or in 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.
A congeneric merger is also known as a Product Extension merger. In this type, it is a combining of two or more companies that operate in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D). 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 are able to 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.
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. To extend their markets, Eagle Bancshares and RBC Centura merged in 2002.
A merger is the voluntary fusion of two companies on broadly equal terms into a new legal entity.
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.
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 the cost reduction, which results from merging with one or more supply companies. One of the most well-known examples of a vertical merger took place 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, consolidation, and market extensions in the beer market. The newly named 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 number three and five largest brewers in the world. 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 industry consolidation but also 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 for $181 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 for $130 billion.
What Is a Horizontal Merger?
A horizontal merger is when competing companies merge—companies that sell the same products or services. The T-Mobile and Sprint merger is an example of a horizontal merger. Meanwhile, a vertical merger is a merger of companies with different products, such as the AT&T and Time Warner combination.
What Is an SPAC Merger?
A special-purpose acquisition company (SPAC) merger generally takes place when a publicly-traded SPAC uses the public markets to raise capital to buy an operating company. The operating company mergers with an SPAC and becomes a publicly-listed company.
What Is a Reverse Merger?
A reverse merger, also known as a reverse takeover (RTO), is when a private company purchases a publicly-traded company. The New York Stock Exchange (NYSE) completed a reverse merger with Archipelago Holdings in 2006.