Last week we introduced business mergers and explored three common types of mergers available to businesses looking to expand their scope. Conglomerate, market extension and product extension mergers all involve joining two or more businesses to benefit both.
The success of mergers is based on the idea of synergy: that the performance of two companies combined will be greater than their total performance if conducted separately. Horizontal and vertical mergers traditionally involve businesses in the same market that manufacture or distribute related – or even identical – goods and services. Both increase the merged business’ market share, potentially yielding greater profits.
A horizontal merger occurs between two companies in the same industry, sometimes direct competitors. Two companies providing the same product in the same market may merge to create a new, larger organization with more market share.
The combination of two competing restaurants in the same market could be classified as a horizontal merger. Both businesses would increase their market share and reach a broader consumer base.
A vertical merger is a merger between two or more companies at different levels of a common product’s supply chain. For example, an automobile manufacturer may merge with a parts supplier. This enables the auto company to get a better deal on parts and provides the parts company with a steady stream of business.
If you are a business owner considering a merger or acquisition, it is wise to seek professional counsel to make sure your contracts are sound and your business is protected. Consider speaking with an experienced business law attorney to ensure the best possible outcome for you and your business.
Source: The Minority Business Development Agency, “5 Types of Company Mergers“