Merger Definition, Types, and Reasons for Companies’ Pursuit

In the course of running a business, various possibilities arise for mergers and other business processes. In simple terms, a merger entails the unification of two or more companies into a new business unit. Typically, these companies share similarities in size, target markets, and business scale. During the merger process, companies usually include a no-shop clause to prevent acquisitions or additional mergers.

The unification of companies, or mergers, typically occurs through the transfer of ownership via a stock exchange or direct cash payment. Essentially, companies relinquish their shares and issue new shares as part of the new company.

In Indonesia, numerous companies have successfully conducted mergers, such as PT Lippo Karawaci Tbk. This company was formed through the merger of eight former companies in the Lippo Group: PT Lippo Land Development Tbk, PT Siloam Healthcare Tbk, PT Kartika Abadi Sejahtera, PT Aryaduta Hotels Tbk, PT Lippo Karawaci Tbk, PT Sumber Waluyo, PT Metropolitan Tatanugraha, and PT Ananggadipa Berkat Mulia.

A merger offers several advantages, including combined assets, enhanced company competencies, and a stronger market presence. However, like any other business process, mergers may also entail certain risks. Before delving deeper, let’s explore the types of business mergers.

Also read: The Difference Between Merger and Acquisition in Business

Merger Types

Merger Definition, Types, and Reasons (source: freepik)

There are several types of company mergers, depending on the goals of the companies involved. Here are the most common types:

1. Conglomerate Merger

This involves the merger of two or more companies engaged in unrelated business activities. These companies may operate in different industries or locations.

The purpose of this merger is primarily to acquire new products or expand into new markets.

Companies with no overlapping factors may merge only if they can create synergies to increase valuation, performance, or budget efficiency.

2. Horizontal Merger

This type of merger occurs between companies operating in the same industry. Typically, it involves the consolidation of several competitors offering similar products or services.

Horizontal mergers often take place in industries with limited competition. The goal is to create a larger business operation with a stronger market position and greater economic scale, as competition within the industry is intense.

3. Vertical Merger

A vertical merger is the combination of two or more companies operating at different stages of the supply chain.

This type of merger is usually pursued to increase synergy and achieve cost efficiencies through the consolidation of supply companies. It commonly involves the main business merging with supporting businesses such as suppliers or distributors.

4. Market Expansion Merger

This type of merger occurs when two or more companies that sell similar products or services compete in different markets. The objective is to gain access to a larger market and expand the client base.

5. Product Expansion Merger (Congeneric Merger)

A product expansion merger takes place between two or more companies operating in the same market or sector with overlapping factors such as technology, marketing, production processes, and research and development.

It involves adding a new product line from one company to another, thereby accessing a larger customer group and market.

Also read: What is Due Diligence: Definition and Types

Reasons Behind Company Mergers

Several reasons drive companies to pursue mergers, with the primary focus on the benefits they can bring. Here are some common reasons:

1. Financial capacity

Mergers can help companies overcome financial problems by increasing their capacity to support business operations.

2. Company synergy

Merging companies aim to generate more profits for their shareholders, often through synergy. Synergy can result in an increased company valuation after the merger. There are two types of synergy: income and cost.

Income synergy arises from market expansion, product diversification, research and development, etc., while cost synergy involves creating a more cost-efficient structure by leveraging the merger’s economic scale, accessing new technologies, and reducing expenses.

3. Product diversification

Mergers enable business owners to diversify their product or service offerings, minimizing risks and potential losses in their operations.

4. Asset acquisition

Mergers can be pursued to gain or acquire assets that may not be attainable through other means, particularly valuable technology assets.

5. Lower tax

Companies burdened with high tax liabilities may merge with other companies that have substantial tax losses. Through consolidation, the total tax liability of the merged entity can be reduced.

Also read: What Are Acquisitions in Business? Here’s What It Means

Merger Risks

Merger Definition, Types, and Reasons (source: freepik)

Like any business process, mergers come with risks. Companies should carefully consider these potential challenges before making merger decisions. Here are some risks associated with mergers:

1. Employee Attrition

Restructuring is often necessary after a merger, which may impact employee retention rates.

Companies need to create a sense of security and maintain employees’ trust during these changes to avoid high turnover rates and the need for extensive hiring.

2. Negative Impact on Competition

Mergers, especially between large companies, can diminish healthy market competition due to increased market coverage. Some countries have organizations or laws in place to oversee such processes and ensure fair competition.

3. Integration Challenges

Successful integration is crucial for a merger’s success. Failure to effectively integrate the merged entities can lead to merger failure. Therefore, companies must have a well-defined integration plan in place before finalizing the deal.

4. Loss of Stakeholder Trust

Not all stakeholders may support the merger decision, which can result in a loss of confidence in the company. Maintaining open communication and addressing stakeholders’ concerns are vital to preserving trust.

5. International Obstacles

Mergers between companies from different countries pose additional challenges due to cultural and language differences. Adaptation to a global merger may require more time and effort.

Those are the things that we need to know regarding the company’s merger. Despite the risks, many companies have executed successful mergers and reaped significant benefits from the process.