DIFFERENT TYPES OF MERGERS AND ACQUISITIONS (M&A)

Mergers can be differentiated into various types depending on the following:

INTEGRATION FORM – Mergers can be classified on how both the companies physically combine themselves in the transaction to form one entity.

RELATEDNESS OF BUSINESS ACTIVITIES – Mergers can be classified depending on how the business activities of both the companies relate to each other. The economic  function and the purpose of the transaction define the types of mergers.

CLASSIFICATION BY THE FORM OF INTEGRATION:

The mergers can be classified as follows on the basis of forms of integration:

STATUTORY MERGER:

• A statutory merger is one in which all the assets and liabilities of the smaller company is acquired by the bigger (acquiring) company. As a result, the smaller target company loses its existence as a separate entity.
  • Company A + Company B = Company A

SUBSIDARY MERGER:

• A subsidiary merger is one in which the target company becomes a subsidiary of the bigger acquiring company. This happens because the target company may have a known brand or a strong image which would make sense for the acquiring company to retain.
  • Company A+ Company B = (Company A+ Company B)

CONSOLIDATION:

• A consolidation merger is one in which both the companies lose their identity as separate entities and become a part of a bigger new company. This is generally the case with both the companies being of the same size.
  • Company A+ Company B = Company C

CLASSIFICATION ON THE BASIS OF RELATEDNESS OF THE BUSINESS ACTIVITIES:

 The mergers can be classified as follows on the basis of relatedness of the business activities:

HORIZONTAL MERGERS:

• Horizontal Mergers happen when a company merges or takes over another company that offers the same or similar product lines and services to the final customers, which means that it is in the same industry and at the same stage of production.
• Companies in this case are usually direct competitors.
• For example, if a company producing cell phones merges with another company in the industry that produces cell phones; this would be termed as horizontal merger.
• The benefit of this kind of merger is that it eliminates competition, which helps the company to increase its market share, revenues and profits.
• Moreover, it also offers economies of scale due to increase in size as average cost decline due to higher production volume.
• These kind of mergers also encourage cost efficiency, since redundant and wasteful activities are removed from the operations.i.e various administrative departments or departments such as advertising, purchasing and marketing.

VERTICAL MERGER:

• A vertical merger is a merger between companies that produce different goods or offer different services for one common finished product.
• The companies operate at different levels in the supply chain of the same industry.
• The motivation behind such mergers is cost efficiency, operational efficiency, increased margins and more control over the production or the distribution process.
• There are two types of vertical mergers:
  • BACKWARD INTEGRATION :
    • A vertical integration where a company acquires the suppliers of its raw materials.
  • FORWARD INTEGRATION:
    • A vertical integration where a company acquires the distribution channels of its products.

CONGLOMERATE MERGER:

• A merger between companies that operate in completely different and unrelated industries.
• A pure conglomerate merger is between companies with totally nothing in common.
• A mixed conglomerate merger is between companies looking for market or product extensions.

MARKET EXTENSION MERGERS:

• Mergers between companies that have same products to offer but the markets are different.
• The reason behind such mergers is access to bigger markets and an increase in client base.

PRODUCT EXTENSION MERGERS:

• A merger between companies that have different but related products but the markets are same.
• Such mergers allow the companies to bundle their product offerings and approach more consumers.

The Mergers can also be classified as:

COMPLEMENTARY or SUPPLEMENTARY MERGER:

• A complementary merger aims at compensating for some limitation of the acquiring company.
• The target company may be an attempt to strengthen a process or enter a new market.
• A supplementary merger is one in which the target company further strengthens the acquiring company.
• The target may be similar to the acquiring company in this case.

HOSTILE or FRIENDLY MERGER:

• A merger can be hostile or friendly depending on the approval of its directors.
• If the board of directors and the mangers of the company are against the merger, it is a hostile merger.
• If the merger is approved by them, it is a friendly merger.

ARM’S LENGTH MERGER:

• This type of a merger is a merger that is approved both by the disinterested directors and the disinterested stockholders.

STRATEGIC MERGER:

A merger of a target company with an aim of strategic holding over a longer term. An acquirer may pay a premium to target in this case.