Thursday, 24 November 2016

Mergers and Acquisitions: Types of Mergers

Most mergers fall into three categories:

  • Horizontal Merger
  • Vertical Merger 
  • Conglomerate Merger

Horizontal Merger

This occurs between two companies in the same industry.

For example, two oil companies decide to merge.

They believe they can create efficiencies within the company and thus eliminate costs and improve profitability.

This inevitably causes valuation to increase because profitability is a key driver of valuation.

In doing so, the two companies have achieved some synergy and this type of horizontal merger makes sense.

Vertical Merger

This occurs between two companies involved in different stages of production.

For example, two companies in a media industry decide to merge.

One produces content, and the other owns a network with vast distribution capabilities.

This result in a perfect formula for a successful vertical merger, with content and delivery now offered by one company.

Ultimately, the different stages of production delivery combine to create more efficiency, more productivity, more profitability and of course, more value.

Conglomerate Merger

This occurs between companies in often unrelated industries that seek to create a diversified portfolio of companies intended to hedge against risk.

This type of merger can create some operating efficiencies resulting from the combination of redundant departments.

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