The Five Most Common Types of Mergers

One of the most common ways for companies to expand their reach, gain market share, and boost revenue and shareholder value is to acquire other business entities or facilitate a merger with another company. In contrast to acquisitions, mergers are voluntary transactions in which two companies, typically of similar size and scale, combine assets to create an entirely new legal entity. Mergers are usually completed to enhance shareholder value and often entail new shares being distributed to the shareholders of the two original companies.

Not all mergers have the same conditions. There are many types of mergers, but the five most common are horizontal, vertical, market extension, product extension, and conglomerate.

In a horizontal merger, companies in direct competition in the same industry join forces to increase their market share. These types of mergers usually occur in competitive industries with a few dominating companies. Those seeking to facilitate a horizontal merger with a competitor usually do so because they have peaked in terms of growth or are seeking to break into new markets. Horizontal mergers can also present companies with increased bargaining power in sourcing raw materials and more pricing leverage in the consumer market.

One of the most notable recent examples of a horizontal merger is the integration of Facebook with social media platforms WhatsApp, Instagram, and Messenger. These companies now all operate under Meta Platforms, Inc. Other examples include mergers between Frito-Lay and Uncle Chipps; PepsiCo. and Rockstar Energy; and T-Mobile and Sprint.

Vertical mergers, meanwhile, are those that involve companies operating within the same supply chain of a particular industry to reduce costs and increase synergies. For instance, an automobile company combining with a parts supplier would be a vertical merger.

A market extension merger involves companies that produce similar products but operate in different markets. As suggested by the name, a market extension creates a larger market base for both entities. RBC Centura’s merger with Eagle Bancshares, Inc., is a good example of a market extension merger. RBC Centura was able to expedite the growth of its operations in the North American market by merging with Eagle Bancshares, which at the time managed more than $1 billion in assets and owned one of the largest banks in the metropolitan Atlanta region.

A product extension merger, also known as a congeneric merger, combines at least two companies in the same market but with overlapping factors, including marketing, research and development, and technology. PepsiCo’s acquisition of Pizza Hut in 1977 is a prime example of a product extension merger.

Finally, a pure conglomerate is a merger between at least two companies that have nothing in common. These companies might operate in different countries or different industries and have no overlapping factors, yet join forces to create synergy. A sneaker manufacturer merging with a soft drink company would be a pure conglomerate.

Mixed conglomerates, meanwhile, involve companies in different sectors that are seeking market or product extensions. The Walt Disney Company’s merger with the American Broadcasting Company (ABC) in 1995 is an example of a mixed conglomerate because Disney already owned cable networks but gained access to new content and distribution sources through the partnership.