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4 common types of business mergers

On Behalf of | Jun 10, 2020 | Business Law

Business owners devote significant time, energy and resources to growing their enterprises. If a venture hits a plateau, though, merging with another organization may make sense. After all, combining talent, capital, equipment and intellectual property is often a recipe for success.

A merger is a binding agreement that combines two companies into one. While there are other ways to accomplish this goal, the most common mergers fall into one of four categories:

1. Horizontal mergers

A horizontal merger joins two companies from the same industry. For example, two automobile manufacturers may come together, allowing the new entity to make cars with a single brand. This type of merger often makes sense for business owners who want to increase market share.

2. Vertical mergers

A vertical merger merges two ventures that perform different tasks but support a common product or service. For instance, a radio assembly outfit may join with a company that manufactures circuit boards. These mergers often allow business leaders to save money on production costs.

3. Conglomerate mergers

A conglomerate merger links two entities that are not in the same sector. That is, the two business ventures seemingly have little in common. One case may be a television network that merges with a grocery delivery service. This approach creates a company that performs many different functions.

4. Extension mergers

An extension merger involves either a market or a product addition. With a market extension merger, two companies have similar products but different markets. For example, a bank that serves one side of Pennsylvania may merge with one that serves the other side. A product extension merger, by contrast, involves two entities that have related products in the same market, such as where two tablet manufacturers join forces. Both market and product extension mergers help organizations reach new customers.

Even though business leaders typically have many options for growing their business ventures, merging with another operation often makes sense. To ensure the merger is successful, though, executives must carefully weigh the advantages and drawbacks of all possible structures before selecting one.