A merger occurs when two corporations willingly partner into a single organization. It is different from a takeover because both companies are equal. It is important for managers to realize that there are, in fact, three distinct types of corporate mergers. Each type serves a different purpose and can fulfill the needs of different companies.
Horizontal Mergers
Horizontal mergers occur when two similar businesses merge. The purpose of a horizontal merger is to gain a better position in the market, to achieve economies of scale and to realize synergies by combining resources. For example, if two car manufacturers merged it would be a horizontal merger. They could benefit by producing all their cars in the same facilities, sharing research and development costs and by marketing their products together.
Vertical Mergers
Vertical mergers happen when two firms that are in a related industry, but that do not perform the same functions, merge. Typically, a vertical merger consists of a merger between a supplier and a buyer. For example, a software company and a hardware company could form a vertical merger. This would provide the software firm with a regular client to sell software to and it would provide he hardware company with a partner to produce exclusive software to fit its needs.
Conglomerate Merger
If a merger is neither a vertical merger nor a horizontal merger, then it is considered a conglomerate merger. A conglomerate merger is a merger between two companies which are unrelated. If, for example, a publishing firm was to merge with an oil and gas company, it would be a conglomerate merger because the two industries are unrelated and there is little potential for synergies. Conglomerate mergers can be beneficial for spreading risk by creating a firm that is involved in unrelated industries. If one industry suffers, the entire firm is not harmed.
Which to Choose
Which type of merger to select depends on the goals of the firm. A company that wants to increase its market share or desires to be a large player in an industry can do so with a horizontal merger. A firm that wants to increase efficiency and guarantee the availability of products can achieve this goal with a vertical merger. Firms that simply want to grow without a focus, or that want to intentionally diversify, will benefit from a conglomerate merger.
