Types of Company Mergers

Saptaswara Chakraborty| North Eastern Hill University| 11th June 2020

Introduction

With the increase in competition in the business world, the process of merger and acquisition has gained significant importance. The process of merger and acquisition is mainly done for expanding the reach of the company or restructuring the business organisation. In India, the policy was first started by the government institutions after the advent of the globalisation. In the year 1991, the domestic markets had to be opened to the global markets, leading to the rise in the market competition, thus resulting in the governments to quickly adopt such a policy. The rippling effect of the policy of merger can be traced to the various parts of the country with its effect varying from good to bad. The policy of merger did not develop a firm ground until the last couple of years. The process of a merger has created an advantage for even the entrepreneurial sector for it acts as an opportunity to increase the shareholding capacity and with a reduced rate of risks. In this article, we shall be dealing mainly with the types of company mergers while understanding a bit about a merger.

What is a merger?

A merger may be defined as a combination of two companies where one company or corporation is completely absorbed by the other. It is a form of agreement which unites two companies as one. A company may undergo merger due to various reasons one of them being to increase or expand a company’s reach. A merger is the voluntary combination of two companies by coming to equal terms for a new corporation. Although the idea of a merger seems to be profitable, it has been found that 60% of the companies that undergo mergers end up losing their ground in terms of positioning in the market, shares and also sometimes losing their business in the long run. The reason for the merger looking like a profitable policy is because of the reduced effort and the amount of time that is required to achieve a particular objective. After the merging of a company, all the assets, stocks, etc. are transferred to the company with whom it has merged, including equity shares, cash and debentures. Mergers can be both strategic or financial, depending upon the requirement of the company. But the most common reasons leading a company to undertake such a step are as follows:

• In order to access market leadership and to rise in the competition within the market leads the companies to form a partnership with a company so that it does not require to shut down.
• To test whether their products or business can attain success across the regions by accessing to the emerging market destinations.
• To reduce the average per-unit cost, thereby increasing the production.
• To avail new ideas, technologies as well as talent.
• To reduce the probability of risks by creating opportunities.
• To increase the cash flow, capital structure and to reduce the debt.

The factors as mentioned earlier represent the idea and the driving factor for a company to adapt to such a policy. The very core concept of a merger is to become one with a company, but such an amalgamation is always a one-degree affair. They can never be treated as a neutral transaction, be it in any scope, including financial or operational. The reason for such a conclusion is because of the reduced amount of credibility of the company or the corporation absorbed, but such a conclusion is not always true because a number of companies are also a beneficiary of such a policy.

Types of Company mergers

Under chapter XV of 2013, Act Section 230 to 240 deals with the “Compromises, Arrangements, & Amalgamations”. Under this Act, it consolidates the applicable provisions and related issues of compromises, arrangements and amalgamation, however other provisions are also related. Some of the major types of Company mergers are as follows:

• Horizontal mergers: A horizontal merger also referred to as horizontal integration refers to the merger that occurs between the two companies of a similar industry or is at the same stage of the industry. A horizontal merger aims to take a company closer towards occupying the entire market by eliminating the potential competitors occupying the same field. Under such a merger, there is the advantage of potential gains in the market share as well as the industry. A good example of such a merger would be of Coco-cola and Pepsi or any other two tea companies. This would help them to extend their monopoly and would thus result in an increase in the market share.
• Vertical mergers- Such a kind of mergers would refer to the combination of the two different companies engaged in two different stages of the industrial process but for a similar output. A good example of such a merger would be the merger of two companies engaged in two different stages of the industrial process. A good example of such a merger would be the merger of two companies engaged in constructional works and the other engaged in the bricks production. The very motive of such a merger is to lower the transactional rate with an increase in demand and supply.  
• Congeneric Mergers- Such a merger refers to the merger between two general industry which is also interrelated. Such institutions do not have a common supplier and customer relationship. The main purpose of such a relationship is to reach the customers of both the business.
• Conglomerate mergers- This type of merger refers to the merger between two unrelated industries. The main reason for such a merger is the utilisation of the financial resources, an increase in the value of the outstanding shares by increasing the leverage and the earnings per share and also by lowering the average of the capital.

Conclusion

The most effective way of a merger to be successful is through increasing the value of the shareholder faster than what it was when the companies were separate. Through this article, an attempt was made to the understanding of the various types of mergers.