DEFINITION of 'Merger'

The combining of two or more companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange for the surrender of their stock.

Types of merger

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

Reverse
merger
A reverse merger - also called a reverse acquisition or reverse takeover - allows a private
company to go public while avoiding the high costs and lengthy regulations associated with
an initial public offering. To do this, a private company purchases or merges with an existing
public company, which may be a "shell company", installs its own management and takes all
the necessary measures to maintain the public listing. For example, portable digital devicemaker Handheld Entertainment did this when it purchased Vika Corp in 2006, creating the
company
known
as
ZVUE.

Merger and efficiency

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate
cost efficiency througheconomies of scale, can enhance the revenue through gain in market
share and can even generate tax gains.
The principal benefits from mergers and acquisitions can be listed as increased value
generation,
increase
in
cost
efficiency
and
increase
in market
share.
Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into
these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can
reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following:
Greater Value Generation
Mergers and acquisitions often lead to an increased value generation for the company. It is
expected that the shareholder value of a firm after mergers or acquisitions would be greater
than the sum of the shareholder values of the parent companies.Mergers and

acquisitions generally succeed in generating cost efficiency through the implementation

of economies of scale.
Merger
&
Acquisition
also leads to tax gains and can even lead to a revenue enhancement through market share
gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be
able to generate more value than the separate firms. When a company buys out another, it
expects that the newly generated shareholder value will be higher than the value of the sum of
the shares of the two separate companies.

Mergers
and
Acquisitions
can prove to be really beneficial to the companies when they are weathering through the
tough times. If the company which is suffering from various problems in the market and is
not able to overcome the difficulties, it can go for an acquisition deal. If a company, which
has a strong market presence, buys out the weak firm, then a more competitive and cost
efficient company can be generated. Here, the target company benefits as it gets out of the
difficult situation and after being acquired by the large firm, the joint company accumulates
larger market share. This is because of these benefits that the small and less powerful firms
agree to be acquired by the large firms.
Gaining Cost Efficiency
When two companies come together by merger or acquisition, the joint company benefits in
terms of cost efficiency. A merger or acquisition is able to create economies of scale which in
turn generates cost efficiency. As the two firms form a new and bigger company, the
production is done on a much larger scale and when the output production increases, there are
strong chances that the cost of production per unit of output gets reduced.
An increase in cost efficiency is affected through the procedure of mergers and acquisitions.
This is because mergers and acquisitions lead to economies of scale. This in turn promotes
cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of
operations of the new firm increases. As output production rises there are chances that the
cost per unit of production will come down
Mergers and Acquisitions are also beneficial

When a firm wants to enter a new market

When a firm wants to introduce new products through research and development

When a forms wants achieve administrative benefits

To increased market share

To lower cost of operation and/or production

To gain higher competitiveness

For industry know how and positioning

For Financial leveraging

To improve profitability and EPS

An increase in market share is one of the plausible benefits of mergers and acquisitions. In
case a financially strong company acquires a relatively distressed one, the resultant
organization can experience a substantial increase in market share. The new firm is usually
more cost-efficient and competitive as compared to its financially weak parent organization.
It can be noted that mergers and acquisitions prove to be useful in the following
situations:
Firstly, when a business firm wishes to make its presence felt in a new market. Secondly,
when a business organization wants to avail some administrative benefits. Thirdly, when a
business firm is in the process of introduction of new products. New products are developed
by the R&D wing of a company.
Different economies of scale include:

Technical economies; if the firm has significant fixed costs then the new larger firm
would have lower average costs,

Bulk buying A bigger firm can get a discount for buying large quantities of raw
materials

Financial better rate of interest for large company

Organisational one head office rather than two is more efficient

Note a vertical merger would have less potential economies of scale than a horizontal
merger e.g. a vertical merger could not benefit form technical economies of scale. However
in a vertical merger there could still be financial and risk-bearing economies.
Some industries will have more economies of scale than others. For example, car
manufacture has high fixed costs and so gives more economies of scale than two clothing
retailers.
2. International Competition. Mergers can help firms deal with the threat of multinationals
and compete on an international scale.
3. Mergers may allow greater investment in R&D This is because the new firm will have
more profit which can be used to finance risky investment. This can lead to a better quality of

goods for consumers. This is important for industries such as pharmaceuticals which require a
lot of investment.
4. Greater Efficiency. Redundancies can be merited if they can be employed more
efficiently.
5. Protect an industry from closing. Mergers may be beneficial in a declining industry
where firms are struggling to stay afloat. For example, the UK government allowed a merger
between Lloyds TSB and HBOS when the banking industry was in crisis.
6. Diversification. In a conglomerate merger two firms in different industries merge. Here
the benefit could be sharing knowledge which might be applicable to the different industry.
For example, AOL and Time-Warner merger hoped to gain benefit from both new internet
industry and old media firm

Conclusion
When two companies merge resources, the resulting transaction can be known by many
names. Whether a company calls a deal a merger or an acquisition is largely a function of
how the management chooses to present the transaction to its own employees and to the
public. Mergers can take place between many different types of companies such as
competitors, industry partners, or corporations with an input-output relationship - and may
serve to either increase or decrease earnings per share. Regardless of how the companies are
characterized, one thing remains the same: mergers are always friendly in nature, while
acquisitions
can
be
either
friendly
or
hostile.
Merger-related efficiencies are taken into account in all the competition policies reviewed but
in different ways. A comparison demonstrates that most diversities concerning efficiency
defence are based on different legal, procedural and institutional approaches. Nevertheless,
there are also similarities in considering cost savings due to mergers. In all competition laws,
efficiencies are contemplated in indefinite terms in order to have leeway for the diverse forms
of cost savings. But the three competition policies differ regarding the scope of accepted
efficiencies. While the European Commission and the US antitrust agencies consider only
real economies, the range of German ministerial approval extends to advantages in the public
interest. All three policies have high requirements for accepting efficiencies as a procompetitive factor in merger analysis. The US and the German authorities have established
detailed standards.36 In contrast, the European Commission gives the parties little guidance
on how to meet the progress criteria. With regard to the trade-off analysis, a balancing of the
pro-competitive and the anti-competitive effects of a merger is only possible under the
German and the US regulations. Since German competition policy is based on the social
welfare standard and US antitrust policy on the consumer welfare standard, different methods

are used to weigh the advantages of a merger against the disadvantages. As far as efficiencies
are proven, equal weight is placed on both merger effects. In contrast, European competition
policy places more weight on competition restraints than on efficiency gains. Even though the
unequal treatment of efficiencies and market power effects excludes a formal trade-off
analysis, the European Commission tends to resolve that issue indirectly by interpreting the
other merger criteria in a very dynamic way. The conflict between efficiencies and market
power has not yet arisen very often in merger enforcement, although agencies and courts have
recognized efficiencies as a factor that may tilt the balance in favour of an otherwise anticompetitive transaction. The review of the relevaht merger cases demonstrates clearly that
complaints by the firms that competition law is too restrictive concerning efficiency issues is
without substance. Thus, in cases where the merging parties claim efficiencies but the
competition agency refuses to allow the proposed merger, the alleged savings are either not
verifiable or not high enough to offset the competition concerns. The legal framework of the
merger policies examined is therefore sufficient to meet the challenge of the current merger
wave.