Business owners who are considering a merger often have many questions about the best way to proceed. After all, there’s on one-size-fits-all answer to how to merge two companies and the option you choose is likely to cause ripples that will affect the merged entities’ financial health and success.
At NorthStar Venture Partners, we have experience building and selling business, and we’ve represented buyers on both sides of the table. We understand the different types of mergers and how they work. Here are 5 different types of mergers and some pointers on choosing the type that’s best for your company.
#1: Congeneric Merger
A congeneric merger is sometimes known as a product extension merger. It happens when two companies in the same sector or market merge. In this type of merger, the merging companies are likely to share overlapping factors such as technology, production processes, research and development, or market share.
The merger is a product extension merger when a product from one of the merging entities is added to an existing product line of the other. This type of merger allows the new entity to expand its customer base and sales. For example, if two companies that made athletic wear merged, it would be considered a congeneric merger.
#2: Conglomerate Merger
A conglomerate merger is a merger between two or more companies with unrelated business activities. They may be separated by product types or geography. A pure conglomerate merger would involve two companies with no overlap, such as an athletic wear manufacturer merging with a company that made cleaning products.
There is a type of conglomerate merger that involves companies that aren’t related, but the merger happens with the hope that the new, merged company will gain product or market extensions as a result. A good example of this type of merger was the merger between Walt Disney and ABC.
#3: Market Extension
Sometimes, a merger happens between two companies who sell similar products in different sectors of the market. A market extension merger is designed to help the newly-created entity grab a larger market share than the separate companies’ combined share.
For example, if two regional banks or credit unions merged, it would be considered a market extension merger. The new entity would have clients in two separate regions, making it a more formidable competitor. As a larger entity, it would also be able to attract new clients in both regions with increased visibility and clout.
#4: Horizontal Merger
A horizontal merger is a merger that occurs between two companies in the same sector who produce similar products, and often occurs between companies who are in direct competition with one another. This type of merger is most common in industries with few competitors because the resulting gain in market share is likely to be significant.
A benefit of horizontal mergers is that they often result in economies of scale. A large company may be able to negotiate lower rates for manufacturing, processing, and packaging than a small company.
#5: Vertical Merger
A vertical merger is a merger between two companies that produce components (or assemble components) for the same product. By merging two companies at different levels in the same supply chain, it’s possible to reduce costs for the finished product.
For example, if an car manufacturer merged with a company that manufactures automotive paint, it would be a vertical merger.
What Type of Merger is Right for You?
Now that you understand the five types of mergers, let’s talk about how to determine which type is right for you. Here are some questions to ask.
- What overlap or commonalities exist between the two companies’ products?
- Do the two companies operate in the same market sector?
- Are you in direct competition with one another?
- What are your goals for the merger?
These four questions should offer you the guidance you need to choose a merger type. For example, let’s say that your answers to the questions were as follows:
- We manufacture similar and complementary products.
- We operate in different regions.
- We are not in direct competition because of our geographical differences.
- My goals are to gain access to a new market.
The clear answer for this hypothetical merger is a market expansion merger. If the two companies operated in the same region, you would be looking at a horizontal merger.
It’s possible that your answers won’t be as clear-cut as the ones we’ve provided here. An experienced M & A advisor can help you work through your options and choose the type of merger that’s most likely to deliver the results you want.
Choosing the right type of merger for your company is essential to the merger’s success. The information we’ve included here should help you make the right choice.
Need an experienced advisor to walk you through your merger? Click here to book a call and learn how NorthStar Venture Partners can help!