![Merger of companies: what is it, advantages and disadvantages](https://3capitalpartners.com.br/wp-content/uploads/2022/03/fusion-img-600x410.png)
The year has barely begun and mergers and acquisitions have already appeared in the news. Highlight for two operations in the health area. In February, Hapvida announced an agreement to acquire the health plan operator Smile, in a deal worth R$300 million. In the same month, the medical clinic franchise network Partmed and the benefit card startup Tem Saúde announced the merger of their businesses, without revealing the value of the deal.
The first quarter of 2022 has been following the intense pace of M&A operations seen in the country last year. It is worth understanding a little more about the types of mergers that companies can make and their objectives:
Establish a conglomerate
In this case, the merger takes place between two or more companies involved in unrelated business activities. These companies may operate in different industries or in different geographic regions. The so-called “pure conglomerate” involves two companies that have nothing in common. The “mixed conglomerate” happens between organizations that, while operating in unrelated commercial activities, seek to obtain product or market extensions through merger. Examples of this type of merger are Louis Vuitton with Moët and Chandon (now LVMH) and The Walt Disney Company and American Broadcasting Company (ABC).
Product Extension Merger
It is the union of two or more companies that operate in the same market or in the same sector with overlapping factors, such as technology, marketing, production processes and research and development. Product extension merger is achieved when a new product line from one company is added to an existing product line from another company, reaching a larger group of consumers and a greater market share. An example of a product extension merger was the merger of Citigroup in 1998 with Travelers Insurance, two companies with complementary products.
Market extension merger
This type of merger happens between companies that sell the same products in different markets. With the merger, the companies are able to expand their market and customer base. An example of this type of merger was between LAN Chile and TAM, which gave rise to LATAM.
Horizontal fusion
It happens between companies that operate in the same industry, and the deal is usually part of the consolidation between two or more competitors that offer the same products or services. The objective is to create a larger business, with greater market share and economies of scale. The merger of Daimler-Benz and Chrysler is considered a horizontal merger, and took place in 1998. ExxonMobil, created in 1999 as a merger of Exxon and Mobil, is another example.
Vertical fusion
A vertical merger happens when two companies operating at different levels within the same supply chain in the same industry merge their operations. This movement happens to increase the synergies obtained through the cost reduction that results from the merger with one or more supplier companies. An example of a vertical merger was when Santander Brasil formed a joint venture with Hyundai to create Banco Hyundai Capital Brasil and an insurance brokerage.
Is merger different from acquisition?
The terms are often used together, “mergers and acquisitions” or M&A, but, yes, merger and acquisition are different operations. Acquisition is a transaction in which one company absorbs another company through a purchase. The term merger is used when the companies involved come together to form a new organization. But each combination is a unique case, has its peculiarities and reasons, and the use of these terms can overlap.
Possible advantages of a merger
Depending on the type of merger that is carried out and the companies involved, the agreement can make the new organization gain a greater market share, staying ahead of the competition. Another positive aspect is that the merger can generate economies of scale, in the purchase of raw materials, for example, which can result in cost reductions. Investments in assets tend to be spread over larger production, which leads to technical savings.
When two companies in the same industry come together, and they serve the same market, the move eliminates or diminishes competition. The merger may also allow the company to expand its geographic area of operation. Ultimately, this kind of strategy can save a company from bankruptcy and keep jobs.
Possible disadvantages of a merger
When the companies participating in the merger serve the same market, they were previously competitors, so this can lead to a monopoly and drive up prices for consumer products and services. Internally, the merger brings communication challenges and the alignment of different corporate cultures – which, when done poorly, can lead to a drop in productivity and team performance. Some businesses of this type also end up generating layoffs when there are overlapping positions.