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Types of Mergers

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Learn about the types of mergers 1. Horizontal Merger 2. Vertical Merger 3. Co-Generic Merger 4. Conglomerate Merger 5. Reverse Merger 6. Merger Through Absorption 7. Merger Through Consolidation

1. Horizontal Merger

Horizontal mergers are a merger of two competing firms in the same industry which is engaged in the production of similar products or services. It is a merger with a direct competitor.

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2. Vertical Merger

When two or more companies involved in different stages of activities like production or distribution combine with each other the combination is called Vertical merger. It is a merger of two organizations that are operating in the same industry but at different stages of production or distribution system.

Some of the types of vertical merger are: a. Forward Integration b. Backward Integration  

3. Co-Generic Merger

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In Co-generic or circular merger two or more merging organizations are associated in some way or the other related to the production processes, business markets, or basic required technologies. 

4. Conglomerate Merger 

It is the combination of companies engaged in unrelated businesses. There are no linkages with respect to customer groups, customer functions and technologies being used. There are no important common factors between the organizations in production, marketing, research and development and technology.

 5. Reverse Merger

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It occurs when firms want to take advantage of tax savings under the Income Tax Act (Section 72A) so that a healthy and profitable company is allowed the benefit of carry forward losses when merged with a sick company. Godrej soaps merged with the loss- making Godrej Innovative Chemicals.

6. Merger Through Absorption

An existing company may absorb one or more companies where the absorbed companies lose their identity. 

7. Merger Through Consolidation

Two or more companies merge to form a new entity with a new name and new objectives. This form of merger involves legal dissolution of all the companies and the new entity acquires all the assets and liabilities of the dissolved companies.

Additionally also learn about some more types of mergers:1. Negotiating Merger 2. Tender Offer 3. Hostile Takeover Bid 4. Arranged Mergers


Types of Mergers and Acquisitions: Horizontal Merger, Vertical Merger, Co-Generic Merger, Conglomerate Merger, Examples and More…

Types of Mergers – Horizontal, Vertical and Conglomerate Merger 

Types of Mergers:

Corporate restructuring is concerned with the change in either the composition of liabilities and assets or ownership of an organization. The most common form in which corporate restructuring takes place is the merger. 

The merger refers to the corporate strategy dealing with the purchasing, selling, and combining of two or more organizations. The merger can be usually classified into three types.

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Let us discuss types of mergers in detail in the following points:

Type # 1. Horizontal Merger:

Takes place when two or more organizations dealing in similar lines of activity come together. An organization enters into horizontal merger to eliminate or reduce competition and reap economies of scale in various activities, such as production, research and development, and marketing.

Type # 2. Vertical Merger:

Represents a merger in which both the organizations belong to different stages of production. For example, if a finished-goods manufacturing organization enters into a merger with its raw material supplier, then it would be known as vertical merger. 

An organization enters into vertical merger to reduce the cost of raw material and distribution. It helps in reducing the overall cost of production for the organization.

Type # 3. Conglomerate Merger:

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Refers to the merger of organizations engaged in totally unrelated lines of activities. For example, if an organization operating in the textile industry opts to go for merger with an organization operating in the telecommunication industry then it is known as conglomerate merger. In this kind of merger, the risk is diversified.


Types of Mergers – Horizontal, Vertical, Co-Generic and Conglomerate Merger (With Examples)

Types of Mergers are as follows:

Type # 1. Horizontal Merger:

Horizontal mergers are a merger of two competing firms in the same industry which is engaged in the production of similar products or services. It is a merger with a direct competitor.

It helps to obtain economies of scale in production by 

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i. Eliminating duplication of facilities,

ii. Widening the product line, reduction in investment,

iii. Elimination of competition in product market,

iv. Increase market share,

v. Decrease in working capital and fixed assets investment, Reduction in advertising costs; etc.

Example:

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i. Formation of Brooke Bond Lipton India Ltd., through the merger of Lipton India and Brooke Bond.

ii. The amalgamation of Daimler-Benz and Chrysler.

iii. Tech Mahindra and Satyam Merged to form Mahindra Satyam.

iv. Tata Steel acquired Corus, Mittal Steel acquired Arcelor and Jet Airways acquired Sahara Airlines.

Type # 2. Vertical Merger:

When two or more companies involved in different stages of activities like production or distribution combine with each other the combination is called Vertical merger. It is a merger of two organizations that are operating in the same industry but at different stages of production or distribution system.

There are two types of vertical combinations:

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i. Forward Integration:

It happens when an organization decides to take over its buyer organizations or distribution channels.

Example – A refinery getting into petrol pumps (like RIL) or a film production house getting into distribu­tion and subsequently, into running of cinema halls.

ii. Backward Integration:

It happens when an organization takes over its supplier/ producers of raw material.

Example – Reliance Industries Limited is the most impressive example of backward integration. Starting with a Vimal range of fabrics, RIL went backward into manufacture of polyester fiber and yam, followed by intermediate chemicals, polymers, refinery and finally oil exploration.

Type # 3. Co-Generic Merger:

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In Co-generic or circular merger two or more merging organizations are associated in some way or the other related to the production processes, business markets, or basic required technologies. 

Such mergers include the extension of the product line or acquiring components that are required in the daily operations. It offers great opportunities to businesses to diversify around a common set of resources and strategic requirements.

Example:

i. Organization in the white goods categories such as refrigerators can diversify by merging with another organization having business in kitchen appliances.

ii. Standard equity fund merged with Dr. Reddy’s laboratories.

iii. Karnataka scooters merge with Brooke Bond (India) Ltd.

Type # 4. Conglomerate Merger:

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It is the combination of companies engaged in unrelated businesses. There are no linkages with respect to customer groups, customer functions and technologies being used. There are no important common factors between the organizations in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of these factors.

Such a combination helps in 

i. Lowering of cost of capital,

ii. Optimum utilization of financial resources, and

iii. Enlarging debt capacity.

Example – ITC Limited is a classic case of conglomerate. ITC is into many unrelated businesses, from cigarettes to hotels and paper and paperboards to biscuits and atta (flour).


Top 3 Types of Merger – Horizontal, Vertical and Conglomerate Merger

There are different types of merger and acquisitions can be classified on the basis of the functional relationship. The merger may take place in three ways.

Type # (1) Horizontal Merger:

Horizontal merger refers to the combination of companies engaged in the same line of activity. It is a case of merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands the company’s operations in the same industry.

In this type the top-management of the company being merged is generally replaced by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade.

Merger of Hindustan Lever Ltd. with TOMCO, Maxyon India with Max India, Global Telecom Services Ltd. with Atlas Telecom, Shaw Wallace with East Coast Breweries, Videocon with BPL, Tata Finance Ltd. with Tata Industrial Finance Ltd., GEC with EEC are examples of merger/acquisitions of horizontal type in India.

Horizontal mergers are designed to produce primarily substantial economies of scale and result in decrease in the number of competitors in the industry.

Type # (2) Vertical Merger:

It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. Thus a vertically integrated company has units of business at several stages from raw material to final customers and it controls its marketing and manufacturing activities centrally.

This type of combination is peculiar to an industry where a material passes through a series of distinct processes. Vertical merger may take the form of forward or backward or both ways of combination. By moving backward or forward or both, a company seeks to control areas of sourcing and the market and thereby improve its profitability.

Backward merger refers to moving closer to the source of raw material in their beginning form. Through this form of merger, a company seeks ownership or increased control of its supply systems. Merger of Renusagar Power Supply and Hindalco Industries is a case of this type.

On the same lines merger of Jindal Ferro with Jindal Strips was done with a view to avail synergistic benefits as a large portion of Jindal Ferro’s produce was consumed by Jindal Strips, while, forward merger refers to moving closer to the ultimate customer. 

It consists of a company seeking increased control and influence of its distribution. Many corporations in India such as DCM, Mafatlal, Binny, NTC, Bata, have set up their own retail distribution systems.

The transferee company will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. 

Vertical merger provides a way for total integration to those companies which are striving for owning all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw materials to the retailing of final products).

Type # (3) Conglomerate Merger:

Conglomerate merger consists of a fusion of companies in unrelated lines. The main reason for this type of merger is to seek diversification for the surviving company. A typical conglomerate might be a merger of companies engaged in trading, manufacturing, insurance and other diverse business.

Merger of Forbes Campbell with Gokak Patel Volkart, Jenson and Nicholson India Ltd. with Card Schenck AG (for diversifying into industrial electronics). In this case of mergers the company may not get the operating economies such as those which may arise in case of horizontal and vertical mergers.

In fact, the conglomerate merger results in a portfolio of lines of business. There may neither be increased concentration in any one particular industry (as in horizontal merger) nor new control of raw material etc. (as in case of vertical merger). 

But there is an increase in total economic activities of the company. The conglomerate merger may be called PURE, when the activities of two companies being merged are totally unrelated, e.g., merger of an automobile company with a textile company.

While the co generic merger is when companies engaged in activities which are complementary but NOT DIRECT COMPETITIVE, e.g., merger of a car manufacturer with a scooter manufacturer. The conglomerate merger does not reduce the number of competitors in an industry, but may result in some operating and financial economies to the company.


Types of Merger – Horizontal, Vertical and Conglomerate Merger

There may be many types of mergers but three major ones are:-

i) Horizontal merger

ii) Vertical merger and

iii) Conglomerate merger

i) Horizontal Merger:

Horizontal merger refers to the combination of firms engaged in the same line of activity. Examples would be combining two TV manufacturing companies or two book publishers to gain dominant shares. 

Similarly merger of Hindustan Lever with Tomco, Mannon India with Max India, Global Telecom Service Ltd. with Atlas Telecom, are the other best examples of Horizontal merger.

ii) Vertical Merger:

This is a combination of two or more firms involved in different stages of production or distribution. For example, joining a TV manufacturing (assembling) company and a TV marketing company or joining the paper manufacturing industry with the printing industry are examples of vertical merger.

iii) Conglomerate Merger:

Conglomerate merger consists of a combination of firms engaged in unrelated lines of business activities. A typical example is merging of different businesses like manufacturing of cement products, fertilizers products, electronic products, insurance investment and advertising agencies etc.

The main reason for this type of merger is to seek diversification for surviving company. The best example of conglomerate merger is the merger of Jonson and Nicholson India Ltd. with a German firm. Cord Schenck, A.G


Types of Merger – Merger through Absorption and Merger through Consolidation

Mergers can take place either through absorption or through consolidation, explained as follows:

Type # i. Merger through Absorption:

An existing company may absorb one or more companies where the absorbed companies lose their identity. For example, Global Trust Bank was absorbed into Oriental Bank of Commerce. Bank of Madura was absorbed into ICICI Bank. Both Global Trust Bank and Bank of Madura seized to exist.

Type # ii. Merger through Consolidation:

Two or more companies merge to form a new entity with a new name and new objectives. This form of merger involves legal dissolution of all the companies and the new entity acquires all the assets and liabilities of the dissolved companies. 

Examples of consolidation can be National Bank and Grindlays Bank coming together to create a new entity called National and Grindlays Bank, and Standard Bank and Chartered Bank consolidating to create a new entity called Standard Chartered.

Air India and Indian Airlines also consolidated a new entity called National Aviation Company of India Ltd. This consolidation mode has indeed benefited companies by bringing down overheads, sharing infrastructure, and avoiding potential rivalry.


Top 4 Types of Merger – Negotiating Merger, Tender Offer, Hostile Takeover Bid and Arranged Mergers

There are various modes in which the acquiring company (transferee) can attempt a merger move and therefore, merger can also be classified on the basis of initiative style or the procedure adopted by the acquiring company.

Such types are four in number that are explained below:

Type # (1) Negotiating Merger (Friendly merger)

In this form, both the companies sit together and negotiate for merger. The acquiring firm negotiates directly with the management of the target company. So the willingness of the management of the target company is implied here. If the two companies reach an agreement the proposal for merger may be placed before the shareholders of the two companies.

However, if the parties do not reach an agreement, the merger proposal stands terminated and dropped out. The merger of ITC Classic Ltd. with ICICI Ltd. and merger of Tata Oil Mills Co. Ltd. (TOMCO) with Hindustan Lever Ltd. were negotiated mergers. 

However, if the management of the target company is not agreeable to the merger proposal, then the acquiring company may go for other procedures, i.e., tender offers or hostile takeovers.

Type # (2) Tender Offer

A tender offer is a bid to acquire controlling interest in a target company by the acquiring company by purchasing shares of the target company at a Fixed Price. The acquiring company approaches the shareholders of the target company directly to sell their shareholding to the acquiring firm at a fixed price.

This offered price is generally kept at a level higher than the current market price in order to induce the shareholders to disinvest their holding in favour of the acquiring company. The acquiring company may also stipulate in the tender offer as to how many shares it is willing to buy or may purchase all the shares that are offered for sale. Arcelor Steel Co. of 2006 year is an example of Mittal to acquire.

In case of tender offer, the acquiring company does not need the prior approval of the management of the target company. The offer is kept open for a specific period within which shares must be tendered for sale by the shareholders of the target company.

Consolidated Coffee Ltd. was taken over by Tata Tea Ltd. by making a tender offer to the shareholders of the former at a price which was higher than the prevailing market price. In India, after the new takeover code by SEBI, several companies have made tender offers to acquire the target company. The popular case is the tender offer made by the Sterlite Ltd. and then counter-offer by ALCAN to acquire the control of Indian Aluminum Ltd.

Type # (3) Hostile Takeover Bid

The acquiring company, without the knowledge and consent of the target company, may unilaterally pursue the efforts to gain a controlling interest in the target company, by purchasing shares of the later company at the stock exchanges. Such cases of merger/ acquisition are popularly known as RAID.

The Caparo Group of U.K. made a hostile takeover bid in 1988 to takeover DCM Ltd. and ESCORTS Ltd. Similarly, some other NRIs had also made hostile bids to take over some other Indian Companies. 

The new takeover Code of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997, deals with the hostile bids. Now even a high holding of 30-35% of the existing management is not seen to be a deterrent to a well-planned bid.

Type # (4) Arranged Mergers

The Board for Industrial and Financial Reconstruction (BIFR) has also been active for arranging mergers of financially sick companies with other companies under the rehabilitation package. These merger schemes are framed in consultation with the lead bank, the target company and the acquiring company.

These mergers are motivated and the lead bank takes the initiative and decides terms and conditions of merger. The takeover of Modi Cements Ltd. by Gujrat Ambuja Cement Ltd. was an arranged takeover after the financial reconstruction of Modi Cement Ltd.


Types of Merger – Horizontal, Vertical, Conglomerate and Reverse Merger

Types of Merger are as follows:

Type # 1. Horizontal Merger:

A horizontal merger is one that takes place between two firms in the same line of business. Merger of Hindustan Lever with TOMCO and Global Telecom Services Ltd. with Atlas Telecom, GEC with EEC are examples of horizontal merger.

Type # 2. Vertical Merger:

Vertical Merger takes place when firms in successive stages of the same industry are integrated. Vertical merger may be backward, forward or both ways. Backward merger refers to moving closer to the source of raw materials in their beginning form. Merger of Renusagar Power Supply and Hindalco is a case in point.

Forward merger refers to moving closer to the ultimate customer. DU Pont acquired a chain of stores that sold chemical products of the retail level for increased control and influence of its distribution.

Type # 3. Conglomerate Merger:

Conglomerate Merger is a fusion of companies in unrelated lines of business. The main reason for this type of merger is to seek diversification for the surviving company. A case in point is the merger of Brooke Bond, Lipton with Hindustan Lever. While the former was mostly into foods, the latter was into detergents and personal care.

Type # 4. Reverse Merger:

It occurs when firms want to take advantage of tax savings under the Income Tax Act (Section 72A) so that a healthy and profitable company is allowed the benefit of carry forward losses when merged with a sick company. Godrej soaps merged with the loss- making Godrej Innovative Chemicals.

Reverse merger can also occur when regulatory requirements need a firm to become one kind of company or another. For example, the reverse merger of ICICI into ICICI Bank.


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