Contact one of our advisors now Call 0800 088 6004

What Are The Three Types of Mergers?

Reasons to choose Wilson Browne

Taking over a business or exiting one can be a big undertaking.

The three main types of merger are:

  • Horizontal
  • Vertical
  • Concentric

Each arises from different motives for merging companies, and each will have certain strategic and business advantages for the acquiring companies concerned.

What are Horizontal Mergers?

A horizontal merger involves companies that offer the same products or services as each other, with the same type of customers. For example, when Boohoo acquired former Arcadia brands Dorothy Perkins, Burton and Wallis.

One company merging horizontally with another can reduce rivalry, helping the resulting merged company compete more effectively, increasing its market power. It can also offer opportunities for cost savings by eliminating redundancies.

Other motives for horizontal mergers are to create economies of scale and to explore synergies.

The underlying principle is to create value, where the combination of the two companies is worth more than either company on its own.

The merged companies can also share complementary skills and resources.

A real-world example of horizontal integration is Disney’s acquisition of Pixar.

 

What are Vertical Mergers?

In a vertical merger, the companies merging are involved in offering the same goods or services, but at different stages of production.

For example, one company could deal in the raw materials involved in a process in which the other company produces finished goods.

This way, the vertical merger allows for a consolidation of the supply chain, minimising disruption.

Motives for vertical mergers include better quality control, more efficient distribution, reducing costs and improving the flow of communication.

By increasing synergies in this way, companies aim to improve operationally, financially and managerially.

An example of vertical integration is Ikea acquiring a Romanian forest company to ensure its own supply of wood for furniture production.

 

Concentric Mergers

Concentric mergers, also known as congeneric mergers, involve companies merging that serve the same customers within an industry, but aren’t offering them the same products or services.

These types of merger enable companies to expand their offerings, and benefit from areas of shared expertise.

An example of this kind of strategic rationale is Coke buying Vitaminwater, the sweetened water brand.

 

Are There Other Types of Merger?

There are other types of merger besides these main three.

One is the conglomerate merger. This is where two companies from unrelated industries, or from different geographic locations, come together to join forces.

When a conglomerate merger does take place it often allows the acquired company the ability to reach a wider market through expanding its customer base. However ensuring the two companies come together in harmony can prove difficult, as two contrasting entities must function together and adjust their business cultures to effectively work alongside each other.

A pure conglomerate is where the companies involved have nothing in common, while a mixed conglomerate takes place between companies that have a common interest in expanding in a particular market.

Amazon’s purchase of Whole Foods represents a conglomerate merger.

 

Expert Legal Support for M&A

M&A transactions can be complex, involving different types of mergers. For companies to gain the best possible outcome, they should seek expert legal advice.

For more information about our company and commercial law services please contact us.

Rebecca Bird

Posted:

Rebecca Bird

Paralegal

Rebecca is a Paralegal in our Company & Commercial Team based at our Northampton  office. She assists our senior fee earners in dealing with acquisitions and disposals, mergers and corporate reorganisations, management buy-outs, commercial agreements, shareholder disputes, corporate finance and legal formations. Rebecca is currently studying…