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Tuesday, February 16, 2016
Broad categories of mergers
The three broad categories of mergers and
This happens between two companies or
businesses placed in the same market and providing the same products or
services. An example of a horizontal merger/acquisition is the Mobilink-Warid
merger/acquisition. The motives of companies entering into a horizontal
integration are any or all of the following:
scale:By joining together and forming a bigger
company gives the new entity or the expanded entity greater economies of scale.
These are the cost advantages that companies obtain due to size, output, or
scale of operations such as production etc.
combining sales channels for example, companies can increase their outreach and
become a larger player.
and growth: Horizontal mergers are one way of improving market share.
Similarly the businesses merging may conclude that together they can grow
better and because of a better market share will be in a stronger position to
influence the market.
redundancies: Two companies would have two finance departments, two
legal departments, two procurement departments etc. Mergers and acquisitions
can help eliminate redundancies. Obviously this is bad news for the employees
but overall by eliminating redundancies, companies become more profitable.
e.Filling the product range/product line: In some
cases an acquisition of this kind can help fill a product range. So for example
in Mobilink-Warid merger/acquisition, the attraction for Mobilink is the 4G LTE
spectrum which it does not have on its own. Mobilink would be able to provide
4G LTE services to its users ultimately without having paid excessive amounts
for 4G unlike ZONG for example which has paid a large amount for its 4G
Vertical mergers/acquisitions happen between
two companies which – while in the same industry- are in a buyer-seller relationship. Backward
vertical integration would be a company merging with or acquiring its
supplier. Forward vertical integration
would be a company taking over a retailer, wholesaler or distributor. The main
reason for a vertical integration is to ensure either that the supply lines are
reliable, or to ensure greater control over distribution networks and sales
channels. A famous example of this kind of merger is the one that occurred
between Time Warner and AOL in 2000.Time Warner creates content and AOL was the largest internet
dissemination portal at the time. Eliminating redundancies also occurs to a certain
extent in this kind of merger. Similarly it may be useful in order to deploy
certain capacities which previously were not available. This is what happened
with British Petroleum’s 2003 acquisition of Russian TNK company which had oil
reserves but little refining ability or retail marketing for the western
market.BP took over TNK and it was a win win for both sides because BP got
access to oil reserves which it could then utilize in its refineries and sell
through its sales channels.
The conglomerate merger/acquisition usually
happens between two unrelated companies. A great example of this kind of merger
was Phillip Morris’ 1985 acquisition of General Foods i.e. a tobacco giant
taking over a diversified food company. Another example was the 1959
acquisition of Avis, Sheraton Group and Continental Baking Company by
International Telephone and Telegraph Corporation – which were completely
unrelated. The reasons for this sort of merger/acquisition are as under:
a.Breaking through cyclical and seasonal demand: By far the
greatest reason for a buyer acquiring an unrelated business is diversification,
especially when its own product is of a cyclical or seasonal nature. By
breaking into a new market, it ensures that it is constrained by a particular
season or a particular kind of demand.
b.Regulatory pressures:Regulatory pressures in one industry
might force a buyer to look for alternatives in a market or industry that is
not as heavily regulated. This is a very common reason for conglomerate merger/acquisition.
A slight variation on this kind of merger is a concentric or congeneric merger. In this case the two companies are in the same
industry but serve different subsets or markets within it.A merger between a WLL broadband company with
a cellular mobile company would be an example of this congeneric or concentric
merger. Similarly one may argue that Microsoft’s acquisition of Nokia (to enter
into the smart phone market) was this kind of acquisition though it has turned
out to be a colossal failure.
c.Product line extension/market extension: Extension of
product line or market extension – as mentioned above- may be the rationale for
a congeneric or concentric merger.Here
too a product line hole may be filled by acquiring a company that has the
requisite product or intellectual property. Google and Yahoo’s acquisitions of
online app companies are great examples of such mergers/acquisitions. Proctor
and Gamble’s 2005 acquisition of Gillette for men care products was done to
fill a hole in its product line.