When two people collaborate, good things often happen. For example, when you get married, you combine your financial resources, eliminate duplicate expenses, and decrease your cost of living. Great partnerships have also shaped the business world (e.g., Apple’s Steve Jobs and Steve Wozniak). The same can be said for the entertainment industry, which has seen powerful collaborations like John Lennon and Paul McCartney. In these cases, the talents of each partner were magnified by the other.
Similarly, merging two businesses can enhance the power of both halves. When two companies consolidate into one, they combine their assets and personnel and become a new legal entity. As long as integration is handled smoothly, the new company can unlock valuable synergies and take advantage of its increased resources.
Before initiating a merger, it’s natural to have a lot of questions. Let’s take a detailed look at various merger types, the strategies that companies employ, and the pros and cons of merging.
The Four Types of Corporate Mergers
To successfully pursue a merger, you need to have an understanding of the various forms it can take. The right method depends on the specifics of the deal and the type of companies involved.
It’s also important to be aware of the difference between mergers and acquisitions. A merger involves the combination of two companies into a new entity. Meanwhile, an acquisition features one company buying another and rolling it up into existing operations. A great example of this is when Facebook purchased Instagram in 2012.
The four most common merger types are concentric mergers, conglomerate mergers, horizontal mergers, and vertical mergers. Here’s a closer look at what these designations mean.
- Concentric Mergers – Concentric (also called congeneric) mergers involve two companies that are in the same industry but offer different products or services. One example would be a TV station acquiring a newspaper, or an airline purchasing a travel booking agency. These businesses are often complementary rather than direct competitors.
- Conglomerate Mergers – Conglomerate mergers involve two firms that are unrelated in terms of industry, products, or services. For example, an automotive manufacturer acquiring a technology company. These mergers help limit risk by allowing businesses to diversify their revenue streams. While they may seem illogical, these unions can actually enable each company’s products and services to be sold or advertised in new ways. Conglomerate mergers also create opportunities to find synergies on the operational side.
- Horizontal Mergers – Horizontal mergers join two companies that operate in the same industry, sell similar products and services, and have many of the same customers. By combining two companies that are closely matched, it’s possible to reduce competition in the field, eliminate redundancies, reduce waste and inefficiency, and take advantage of economies of scale.
- Vertical Mergers – Vertical mergers unite two companies that focus on different niches within the same industry. These companies often handle different stages of the production process or have a buyer/seller relationship. For example, a vertical merger may involve an automaker buying a company that manufactures glass. These unions can lower sourcing costs and ensure continuous access to necessary supplies or raw materials.
Now that we’ve reviewed merger types, let’s take a deeper dive into the pros and cons of merging.
Why You Should Consider Merging Your Business
Synergy is one of the core reasons why businesses choose to join forces. The idea behind the concept of synergy is simple – two organizations cooperate to produce a combined effect that exceeds what they can create in isolation. Some common synergies include:
- Research and Development – One firm may have access to research and development projects and materials that can improve the products and services of the other. For example, one company might have developed a cheaper raw material that can be used to produce the other company’s flagship product.
- Supply Chain Efficiencies – One business may have access to better supply chain relationships, allowing chains to be shortened and for products to reach the market faster.
- Elimination of Redundancies – When two companies merge, you can eliminate unnecessary costs. For example, you can utilize one management team for both organizations. The newly merged company can also reduce its advertising and marketing budget by half without lessening its efforts.
- Intellectual Property – The merger process can allow a company to gain access to patents that significantly improve their products or services.
- Overlapping Strengths and Weaknesses – A merger may be beneficial for companies that have specific weaknesses in one area. For example, consider a business that has a great brand reputation, but is struggling to keep pace with industry innovation. This company could merge with another one that has less brand recognition but a strong record of innovation and a robust research and development department.
- Combined Financial Reach – Mergers are often instrumental in helping businesses scale and negotiate better terms with suppliers. By combining forces, the new business can purchase at a higher volume and reach a larger audience.
In addition to facilitating synergies, mergers can reduce competition within an industry, improve efficiencies, expand a customer base, tap into shared business intelligence, and allow for the penetration of new markets.
However, the newly created entity should be cautious when it’s time to integrate. There may be clashing corporate cultures, apprehensive employees, and liability concerns. Fortunately, most of these drawbacks can be mitigated through careful planning, due diligence, and the help of an expert business broker.
Essential Steps to Take Before Pursuing a Merger
Companies considering a merger should first determine the preferred structure of the deal. In some cases, a purchase merger (in which Company A buys Company B and runs everything under the banner of Company A) may make sense. Other times, a consolidation merger (where both companies combine to form a new legal entity) may be the better choice.
A qualified business broker can help guide you through this important decision. By working with a professional, you can identify and assess the viability of potential targets and determine your ideal terms and goals. A qualified business broker will also walk you through each step of the merger process.
As a top business broker in CT, VR New Haven has extensive experience helping facilitate and execute mergers in a variety of verticals. For more information about our services, or to schedule a consultation, contact us today!