what are different types of merger and acquisition

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asked May 4, 2015 in Mergers and Acquisitions by Sujata
What are types of merger and acquisitions of companies and firm?

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answered May 16, 2015 by Bharat Sinha Experts

Mergers and acquisitions can take several forms. I have listed those here with explanation.

  1. Horizontal: It is a merger of two competing firms engaged in the production of similar products or providing similar services. The acquiring firm belongs to the same industry as the target company. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities, widening the product line, reduction in investment, elimination of competition in product market, increase of market share, reduction in advertising costs etc.
  2. Concentric: This is a variation of horizontal mergers. It is a combination of two firms that are not in the same industry but operate in related industrial segments. For instance a company with a chain of restaurants may acquire a hotel company. The major difference here is that the merging companies are not competitors, like in the case of horizontal mergers.
  3. Vertical: When two or more companies, involved in different stages of activities like production or distribution, combine with each other the combination is called a vertical merger. An example can be the combination of a car manufacturing company and piston (that is generally bought and used by the car manufacturing company) manufacturing company. The acquiring company attempts to reduce inventories of raw material and finished goods, implements its production plans as per the objectives and economises on working capital requirements. There are two types of vertical combinations.
    a) Forward Integration: In this kind of vertical combination a manufacturer combines with its customer. For example, TV manufacturer merges with TV marketing company.
    b) Backward Integration: In this kind of vertical combination a manufacturer combines with the supplier of input material. For example, the combination of a car manufacturing company with a piston manufacturing firm.
  4. Circular combination: Companies engaged in the production of different products seek combination to share common marketing, distribution or research facilities in order to generate economies. The acquiring company obtains benefits of resources sharing. Another major advantage is achievement of diversification. A variation of circular combination is ‘managerial conglomerates’, which denote combination of general managerial talent of two different companies across all functions.
  5. Conglomerate: This is the combination of companies engaged in unrelated businesses. The basic purpose of such a combination is lowering of cost of capital, optimum utilisation of financial resources and enlarging debt capacity. Conglomerates are used to smooth out fluctuations in the earnings of different businesses. The idea is to diversify and minimise the overall risk. A typical example would be the merging of a cement company, an electronics company, a finance company and a garment manufacturing company.
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