Question

What are the three types of mergers? Classify the following possible merger. Explain why the merger is the type you’ve selected.

a. Starbucks and coffee growers

b. Bank of America and Fleet Bank

c. Microsoft and a steel company

d. Home Depot and Lowe's

Answer 1

Mergers - types: Mergers take place to strengthen positions in one or more markets, gain access to new markets, increase efficiency or just diversify a company's offerings.

1. Horizontal Merger: Horizontal mergers involve companies that offer the same products or services to the same kinds of customers. If your business mows lawns, for example, and you combine with another lawn-care company in your town, that's a horizontal merger.

Horizontal mergers offer "economies of scale," meaning that average costs decline as the company does a greater volume of business. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies: Where the original companies each needed their own purchasing department, advertising budget, benefits program and so on, the merged firm only requires one.

2. Vertical Mergers: A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. Say you own a manufacturing company that makes items out of plastic. Merging with a company that makes raw plastics would be a vertical merger. Vertical mergers help prevent business disruptions: The manufacturing operation no longer has to worry about obtaining enough plastic, while the plastics operation gets a steady customer. Cost savings through eliminating redundant functions are also possible.

3. Concentric Mergers: Concentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but don't offer them the same products or services. If you owned a catering company, for example, and you merged with a business that rents tables, chairs, event tents and party equipment, that would be a concentric merger. Both companies appeal to customers who have events to plan, but not in the same way. Concentric mergers diversify the combined company's offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business, because the firm becomes more of a "one-stop shop" offering more of the services that both companies' customers are typically looking for.

a. Starbucks and coffee growers : Vertical Merger

b. Bank of America and Fleet Bank: Horizontal Merger

c. Microsoft and a steel company: Concentric Merger

d. HomeDepot and Lowe's : Horizonrtal Merger