Reason Behind Each Type Of Merger

By Author: Stevie
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Business is a beast of motivation. All business deals are motivated by something, and 99.9 per cent of the time that motivation is financial; however, it’s not just about making greater sales. Profit margins can be expanded in different ways, and many business deals are about guaranteeing revenues into the future. Different types of mergers offer different types of growth and revenue potential.

Below are the reasons for why a business might choose one type of merger over another.

Horizontal Mergers
When two businesses that more or less do the same thing come together, this is considered a horizontal merger. Combining their forces gives them a larger market share and reduces their costs. Before merging these two businesses, each paid for a supplier to deliver their ingredients. Now as one, bigger business, they pay one supplier that services both locations. Imagine one ice cream shop buying a competing ice cream shop across town. Now the business has two locations allowing it to appeal to twice as many consumers in the relatively same geographic area.

Vertical Mergers
These types of mergers ...
... happen when as business is interested in creating stability. If you are a newspaper company, and you purchase the paper mill that provides your paper products, you can guarantee that the mill will always have at least one steady customer (your newspaper company) and that your newspaper company will never have to worry about disruptions in the supply chain of their paper. A business could continue in this vein by purchasing other aspects of their own supply chain, such as their ink manufacturer, or the transport company that delivers their finished product and/or moves the paper from the mill to the printing shop. There is also some opportunity here to reduce or eliminate some redundancies, which could translate to cost-savings.

Conglomerate Mergers
This is a type of merger where two unrelated businesses come together. This type of merger is good for exit-strategy purposes and to diversify market access. If you plan to shut down a business or think it may be obsolete eventually, you might buy an unrelated business so that you can fall back on something if one of the markets you are in turns sour. It also benefits an owner to have access to two or more separate consumer bases. Your companies can play off of each other’s well-established brands and use them to attract a greater consumer base. Real world examples of this are PayPal, eBay, Amazon, and Whole Foods.

Concentric Mergers
When two business who serve the same customer base but offer different products come together it is called a concentric merger. Business will opt for this type of merger because it expands their product offerings letting them net more of their target audience than previously possible. This can be a huge financial boon when the right businesses come together. An example of such a merger would be if an ice cream shop bought a bakery. You know your consumers love treats and sweets, but you can currently only offer them one type – ice cream. Once you buy a bakery you can now offer them a whole selection of sweets, plus ice cream. By making your business a one-stop-shop for desserts, you will appeal to a much broader crowd, significantly increasing your revenue potential.

Goals and growth and money all drive business decisions. The types of mergers you see happening in the business world are all driven by different agendas, and you can get a peek behind that curtain if you understand which each type of merger means, and what that may imply for the ultimate goal the businesses have. Seek help from Toronto consulting firms to learn more, or for expert assistance with your merger.

Hi, I'm Stevie! The management of personal finances is something I've been very interested in since my high school years. I'd like to share some knowledge on the subject and I really hope it'll help someone.