A Look at the Four Types of Mergers

Mergers can be stressful for any organization, as employees wonder whether their jobs are safe and management must carefully navigate new policies and procedures. A merger happens when two companies unite as one company, typically to expand a company’s reach or increase market share. Ideally, the transaction benefits both companies and their employees.

Four types of mergers exist. A horizontal merger occurs when two companies with similar products elect to combine forces. This often involves two direct competitors that market to the same demographic with an identical or similar product or service. By combining, they expand their reach and eliminate competition. For example, a large company may acquire a startup whose technology meets a specific need or merge with a company that has managed to capture a desirable portion of the market.

Alternatively, a company may choose a vertical merger to increase its means of production. Rather than combine with a direct competitor, it merges with a company that occupies a different place in the supply chain. A shoe company, for example, might merge with a rubber producer, enabling the former to buy materials at a better price, as well as to have greater input into the manufacturing process. A vertical merger allows a company to control more of the supply chain, making its product for less money and gaining an advantage over competitors.

The third type of merger is the concentric merger, which occurs between companies that offer different services or products to the same customers. Like a horizontal merger, a concentric merger aims to capture more of the market share. However, a concentric merger does not involve direct competitors.

A company that sells auto accessories may merge with a company that sells automotive cleaning supplies. Such a merger is logical and beneficial for both companies, as customers with cars need both types of products. By combining forces, all companies can expand their customer base and increase sales.

Finally, a conglomerate merger involves multiple companies selling diverse products or services. In this situation, one company aims to increase its overall market share and productivity by acquiring another company. Generally, conglomerate mergers occur between large companies.

A huge company such as GE might engage in various conglomerate mergers, acquiring businesses with particular specialties. Over the years, GE has engaged in mergers that have helped it thrive in areas ranging from aviation to industrial finance. Conglomerate mergers usually aim to reduce risk by helping a company diversify.

All four types of mergers share common features and are subject to regulations outlined by the Federal Trade Commission. Antitrust laws such as the Sherman Antitrust Act of 1890 govern how companies may engage in mergers and acquisitions, outlining general terms that individual states must interpret. Overall, antitrust laws prohibit a single firm from inhibiting competition by establishing or maintaining a monopoly.

Antitrust laws such as the Sherman Act require companies to notify the government before entering into a merger or acquisition. Additionally, companies may not engage in acts that are overly harmful to competitors. Such acts include price fixing, dividing markets, or rigging bids. Violation of the Sherman Antitrust Act carries a potential criminal penalty of up to $100 million for a corporation and $1 million for an individual. Violators may also face up to 10 years in prison.