Introduction:
A merger is the collaboration o two or more single entities working separately on their own comes together to form a single entity for future business opportunities.
Merger and Acquisition are two different terms used commonly due to some similarities. The Acquisition happens when a big company acquires a small company. The small company sometimes loses its identity in the process of Acquisition.
Merger as n activity is there for quite a significant period.
Companies use these mergers techniques to combat many adverse situations. Companies decide to have a merger as an option when it is the right time to take the collaborative route for the betterment of both parties.
Reasons for the Merger
Companies that opt for a merger want to have an increased market share. An increase in market shares helps both the companies to have a larger pool of buyers as the current buyers of both the companies are now aware of both the company’s offerings. To increase their market share, merged companies target the competitors in the same and related industries.
These companies opt for horizontal, vertical, and conglomerate mergers to expand their firm.
Horizontal Mergers:
When two firms in the same kind of business want to opt for the route of a merger, then it is known as a horizontal merger.
The combination of two companies operating in the same market helps increase the market size of both companies.
A horizontal merger is also very popular among the companies that want to share their resources and skills to have a balance in the organization.
The horizontal merger also decreases competition by reducing the number of firms in the market.
Vertical Merger:
It happens when two companies in the same industry but at different levels of the supply chain decide to merge to create a single entity.
It helps them work as a team and reduces the communication gap between the two.
For example:
Lenovo bought Motorola to support their mobile manufacturing unit as Motorola was the first company to design and launch a phone. Motorola is still relevant and going strong with their android phones and, Lenovo also deals in android phones.
When these kinds of companies merge to form a single unit, it helps them to have better planning and coordination.
Conglomerate Mergers:
Conglomerate Mergers happen when two firms with absolutely different types of business models merge.
The purpose of this kind of merger can be:
Product Extension: It happens when both companies want to expand their product line.
Geographic Extension: It happens when two companies want to expand their geographical boundaries without overlapping each other.
Pure Conglomerate Merger: As the above explanation suggests, two firms with separate business models merge.
Entry to the new market:
When a company wants to enter a new market, they have to face problems like existing competition, product loyalty, and many more.
To overcome these issues, companies have to adopt aggressive marketing strategies. Aggressive marketing strategies like heavy advertising increases the cost of the project. This increased cost motivates the organization to take the route of the merger.
Cost of production:
The cost of a new product is high. It includes the development and the launch of the product. Return on Investment of a new product takes time, and at the same time, it is difficult to analyze the acceptance and sentiment of the market towards the new product.
While in a merger, the product is there in the market for quite some time. The market is also aware of the product. The merger is helpful to eliminate the risk and the costs associated with the development of a new product.
To increase the sources of revenue
Competition is a significant threat to companies’ profitability.
A company dependent on a single or a few products can face the consequences in the future. The merger is helpful to add a new stream of income to the companies’ portfolio by adding another product.
Many companies also aim at a new industry for future-proofing purposes.
Joint Venture V/S Merger:
The joint venture is another popular source of starting a new project with two separate entities.
What makes it different from a Merger?
A joint venture is a collaboration of two or more companies for a project by not creating a single entity but separate entities having their separate ownership.
A joint venture has the requirement of less commitment than a merger. The merger aims at holistic growth, while joint ventures aim at a rather specific goal separately for the joint venture.
Choice of whether to go with the merger or joint venture heavily depends upon the motive of collaboration. It is crucial to analyze each aspect before opting for a method.
The joint venture is helpful when the purpose of the collaboration is short-term and very specific for both parties.
While on the other hand, a merger is helpful for a complete turnaround for a longer period.
