TYPES OF MERGER and ACQUISITION(Based on Relatedness of Business)

There are five commonly-referred to types of business combinations known as

mergers: conglomerate merger, horizontal merger, market extension merger,
vertical merger and product extension merger. The term chosen to describe the
merger depends on the economic function, purpose of the business transaction and
relationship between the merging companies.

Conglomerate

A merger between firms that are involved in totally unrelated business activities.
There are two types of conglomerate mergers: pure and mixed. Pure conglomerate
mergers involve firms with nothing in common, while mixed conglomerate
mergers involve firms that are looking for product extensions or market extensions.

Example

A leading manufacturer of athletic shoes, merges with a soft drink firm. The
resulting company is faced with the same competition in each of its two markets
after the merger as the individual firms were before the merger. One example of a
conglomerate merger was the merger between the Walt Disney Company and the
American Broadcasting Company.

Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is

a business consolidation that occurs between firms who operate in the same space,
often as competitors offering the same good or service. Horizontal mergers are
common in industries with fewer firms, as competition tends to be higher and the
synergies and potential gains in market share are much greater for merging firms in
such an industry.

Example

A merger between Coca-Cola and the Pepsi beverage division, for example, would
be horizontal in nature. The goal of a horizontal merger is to create a new, larger
organization with more market share. Because the merging companies' business
operations may be very similar, there may be opportunities to join certain
operations, such as manufacturing, and reduce costs.

Market Extension Mergers

A market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension
merger is to make sure that the merging companies can get access to a bigger
market and that ensures a bigger client base.

Example

A very good example of market extension merger is the acquisition of Eagle

Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,
Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets
worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten
biggest banks in the metropolitan Atlanta region as far as deposit market share is
concerned. One of the major benefits of this acquisition is that this acquisition
enables the RBC to go ahead with its growth operations in the North American
market.

With the help of this acquisition RBC has got a chance to deal in the financial
market of Atlanta , which is among the leading upcoming financial markets in the
USA. This move would allow RBC to diversify its base of operations.

Product Extension Mergers

A product extension merger takes place between two business organizations that
deal in products that are related to each other and operate in the same market. The
product extension merger allows the merging companies to group together their
products and get access to a bigger set of consumers. This ensures that they earn
higher profits.
Example

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of

product extension merger. Broadcom deals in the manufacturing Bluetooth
personal area network hardware systems and chips for IEEE 802.11b wireless
LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for
handsets that are equipped with the Global System for Mobile Communications
technology. It is also in the process of being certified to produce wireless
networking chips that have high speed and General Packet Radio Service
technology. It is expected that the products of Mobilink Telecom Inc. would be
complementing the wireless products of Broadcom.

Vertical Merger

A merger between two companies producing different goods or services for one
specific finished product. A vertical merger occurs when two or more firms,
operating at different levels within an industry's supply chain, merge operations.
 Most often the logic behind the merger is to increase synergies created by merging
firms that would be more efficient operating as one.

Example

A vertical merger joins two companies that may not compete with each other, but
exist in the same supply chain. An automobile company joining with a parts
supplier would be an example of a vertical merger. Such a deal would allow the
automobile division to obtain better pricing on parts and have better control over
the manufacturing process. The parts division, in turn, would be guaranteed a
steady stream of business.

Synergy, the idea that the value and performance of two companies combined will
be greater than the sum of the separate individual parts is one of the reasons
companies merger.

Concentric/Congenric M&A

 Concentric merger and acquisition occur when two companies are operating
in the same industry and have similar kinds of customer base but offer different
types of products and services. The product can be a compliment one, but in no
manner will it be the same or identical.
 To cite an example, let us take a case where a company producing laptops
merges with a company producing laptop bags. The laptop bag is an essential
requirement of every laptop, but we see the product the products are different.
Thus when this kind of mergers or acquisition takes place, it is called a concentric
merger.
 This kind of merger and acquisition generally occurs to support the
customers to buy the product as a bundle offering instead of buying it in a different
assembly. Also, it helps the company to diversify its offerings and thus generate
higher returns.
 Here the sales of one product will drive the sales of others as we see people
who generally buy laptops will also be requiring a bag to carry it on the move.
Thus, this leads to the generation of more profits for the company. The company
 turns out to be a one-stop destination for the consumers where the company offers
products linked in some way or the other.
 Usually, it is seen these companies have similar production processes and
business markets. This type of merger also has to offer an extended product line.
Finally, this kind of merger helps the company reduce the risk of doing business by
diversifying the product line.