Question

Four classifications of corporate mergers are (1) horizontal, (2) vertical, (3) conglomerate and (4) congeneric. Explain its meaning in the context of a merger analysis in relation to the

(a) probability of a government intervention

(b) probability of operating synergistically

Answer 1

1) A horizontal merger happens when two companies having similar products or services and a similar customer base decides to merge together. Such a merger could be subject to inspection by the government or the competition watchdog as creation of one big entity in a market could lead to monopolistic practices in that industry.
It also creates opportunities for synergy and economies of scale especially in areas such as operations, supply chain and logistics.
2) A vertical integration happens when a company decides to merge with a supplier or one of its channel partner in the distribution side. Such a merger creates a more integrated business model and reduces the uncertainty for the company. However, this kind of merger does provide opportunities to operate synergistically as several capabilities of the upstream or downstream player could be optimised as per the requirements of the company.
3) A conglomerate merger is one wherein a company decides to merge a business which is not related such as a petrochemical company deciding to enter into telecom business through acquisitions. Because of the dissimilarities in the business models, the government intervantion is less likely and so is the less chances of synergy benefits.
4) A congeneric acqusition happens when two companies operating in similar industries but not offering similar products merge. An example would be the hypothetical merger of Walmart and Amazon since they operate in the similar industries of retailing albeit offering different products and services. This could be subject to scrutiny from government side as it could potentially create a behemoth which could indulge in monopolistics practices. Another situation is that potential synergies can be realised by leveraging on the strength of similar products and similar customer base and a large distribution network which could now cater to products from both companies.