As a business owner, you constantly look for new ways to grow your company. You think about ways in which to increase your revenues while decreasing your costs. You think about offering new products or services. But have you ever thought about merging with another company?
The Corporate Finance Institute explains that, by definition, a merger entails two companies joining forces and henceforth operating as a single legal entity.
Merger types
You can avail yourself of the following five types of mergers:
- Vertical merger where the other company operates along the same supply chain line as your company does
- Horizontal merger where the other company represents one of your direct competitors
- Conglomerate merger where the other company provides completely different products and/or services as your company does
- Product-extension merger where the other company provides products and/or services complimentary to the ones your company provides
- Market-extension merger where the other company provides products and/or services similar to those your company provides, but sells and distributes them in a different market than you do
Merger motivations
What motivates two companies to merge depends on the goals and objectives of their respective top managements. Common motivations include the following:
- You may wish to diversify your product/service line and/or your operational costs.
- You may wish to increase your company’s ability to finance its operations.
- You may wish to reduce your company’s tax liability by merging with a company that possesses substantial carry-forward tax losses.
- You may wish to acquire assets that it would take you a long time to acquire internally.
- You may wish to incentivize your managers by “empire building,” i.e., building the biggest or best known company in your industry.
- You may wish to increase your shareholders’ wealth through achieving higher revenues and/or lower production costs.
Whatever your precise motivation, a merger can result in increased stature and revenue for both companies when they operate as one.
