MACR/U1 Topic 1 Types of Mergers
Horizontal mergers: It refers to two firms operating in same industry or producing ideal products combining together. For e.g., in the banking industry in India, acquisition of Times Bank by HDFC Bank, Bank of Madura by ICICI Bank, Nedungadi Bank by Punjab National Bank etc. in consumer electronics, acquisition of Electrolux’s Indian operations by Videocon International Ltd., in BPO sector, acquisition of Daksh by IBM, Spectramind by Wipro etc. The main objectives of horizontal mergers are to benefit from economies of scale, reduce competition, achieve monopoly status and control the market.
Vertical merger: A vertical merger can happen in two ways. One is when a firm acquires another firm which produces raw materials used by it. For e.g., a tyre manufacturer acquires a rubber manufacturer, a car manufacturer acquires a steel company, a textile company acquires a cotton yarn manufacturer etc.
Another form of vertical merger happens when a firm acquires another firm which would help it get closer to the customer. For e.g., a consumer durable manufacturer acquiring a consumer durable dealer, an FMCG company acquiring m advertising company or a retailing outlet etc.
Conglomerate merger: It refers to the combination of two firms operating in industries unrelated to each other. In this case, the business of the target company is entirely different from those of the acquiring company. For e.g., a watch manufacturer acquiring a cement manufacturer, a steel manufacturer acquiring a software company etc. The main objective of a conglomerate merger is to achieve i big size.
Concentric merger: It refers to combination of two or more firms which are related to each other in terms of customer groups, functions or technology. For eg. Combination of a computer system manufacturer with a UPS manufacturer.
Forward merger: In a forward merger, the target merges into the buyer. For e.g., when ICICI Bank acquired Bank of Madura, Bank of Madura which was the target, merged with the acquirer, ICICI Bank.
Reverse merger: In this case, the buyer merges into the target and the shareholders of the buyer get stock in the target. This is treated as a stock acquisition by the buyer.
Subsidiary merger: A subsidiary merger is said to occur when the buyer sets up an acquisition subsidiary which merges into the target.