Meaning, Types, Limitations of Merger

15th October 2021 0 By indiafreenotes

A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies agreeing to mergers are typically equal in terms of size and scale of operations.

Types of Mergers:

  1. Conglomerate merger

Conglomerate merger is a union of companies operating in unrelated activities. The union will take place only if it increases the wealth of the shareholders.

  1. Congeneric/Product extension merger

Such mergers happen between companies operating in the same market. The merger results in the addition of a new product to the existing product line of one company. As a result of the union, companies can access a larger customer base and increase their market share.

  1. Market extension merger

Companies operating in different markets, but selling the same products, combine in order to access a larger market and larger customer base.

  1. Vertical merger

A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency.

  1. Horizontal merger

Companies operating in markets with fewer such businesses merge to gain a larger market. A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition; hence, economies of scale can be achieved.

Limitations:

  • If executives of the absorbed company are not placed at senior ranks in the new company, it will lower third morale and decrease productivity.
  • Empirical studies have shown that growth rate of the merged companies is generally lower than that of merging companies.
  • Merger can result in social ills like monopoly, concentration of economic and social power, restricted supply, high prices etc.
  • In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.
  • The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.