Question

Four economic classifications of mergers are (1) horizontal, (2) vertical, (3) conglomerate, and (4) congeneric. Explain the significance of these terms in merger analysis with regard to (a) the likelihood of governmental intervention and (b) possibilities for operating synergy. Use a practical example for illustrative purposes.

Answer 1

Merger - A merger is an agreement that unites two existing company into one new company

There are 4 types of mergers.

1. Horizontal - A merger between company with similar products ( ex - merger of HP and Compaq)
2. Vertical - A merger that consolidates the supply list of products. (ex - Exxon and Mobil merger)
3. Concentric - A merger between companies who have similar audience with different products (ex - ICICI bank with bank of Madura).
4. Conglomerate - A merger between companies who offer diverse products / services. (ex - Merger of Walt Disney company and American broadcasting company)

In all these types of mergers, Government intervention and synergy policies have great impact. Lets see about them in detail.

Government Intervetion - When two companies combines, it is more possible that the Government gets involved. Mainly during internation mergers, the managers and other key persons needs to analyse the negative Government intervention which is going to happen after this merger. Those impacts may be with regards to the

• The Government policies
• Relationship between the two countries
• Government will be more interested on the benefit which the country is going to get based on this merger.
• Tax policies.

One best example of this is that which happens in the current situation of COVID19. Earlier, the relationship between China and US was not good, so there were many restriction to export goods or to start up a venture in China and US. But now after the Covid issue, the Government policies have changed. Now the company which manufactures ventilators are most welcome. So therefore the Government intervention is a key content which needs to be analysed before going into mergers.

Operating synergy - The increase in the profits and income after the merger is considered as operating synergy. For example - if the net income of Ford is 10Billion and M&M is 15Billion, after the merger if the net income is going to become 30 billion, then the difference amount [ 30 - 25 = 5] will be the operating synergy.

The aim of every company is to earn profits and to reduce cost. So the key concern behind each merger will also be to increase the profits. So only if there is possibility that the profits will be increased, it is much adivisable to go into merger.

Example - In merger of Uber eats and Zomato

Zomato's best competitor is Uber eats, and if this competitor is not there, then Zomato will become the no. one company. So after this merger, Zomato will obvisouly has many growth (increase in profits, increase in customers, etc) this will increase its sale and helps it to increase its income.

So this factor has a key impact during Mergers.