A Business Encyclopedia


Definition: The term ‘merger’ is used to mean the unification of two or more business houses to form an entirely new entity. It leads to the dissolution of more or more entities, to get absorbed into another undertaking, which is relatively bigger in size. It is a strategy adopted by the company to maximise company’s growth by expanding its production and marketing operations, that results in synergy, increased customer base, reduced competition, introduction to a new market/product segment, etc.

It is a form of amalgamation, wherein the assets and liabilities of the companies undergoing amalgamation becomes the assets and liabilities of the amalgamated company. Likewise, the shareholders of the old company, also get their part ownership in the new company.

Forms of Merger

  1. Merger through Absorption: When two or more entities are combined, into an existing company, it is known as merger through absorption. In this type of merger, only one entity survive after the merger, while the rest of all cease to exist as they lose their identity. E.g. Tata Chemicals Limited (TCL) absorbed Tata Fertilizers Limited (TFL).
  2. Merger through Consolidation: When two or more companies fuse to give birth to a new company, it is known as merger through consolidation. This implies that all the companies to the merger are dissolved, i.e. they lose their identity and a new company is created. E.g. Consolidation of Hindustan Computers Limited, Indian Reprographics Limited, Indian Software Company Limited Hindustan Instruments Limited, to form a new company HCL Limited.

The common feature of the two forms of the merger is that the resulting or surviving company acquires the ownership of other entities and unite their operations, with its own.

Types of Merger

  1. Horizontal Merger: The merger is said to be horizontal when the companies that are combined operate in the same industry or deal in similar lines of business. The market share of the newly formed company is greater than the individual entities. It is aimed at reducing competition, increasing market share, economies of scale and research and development.
  2. Vertical Merger: Vertical merger takes place when companies are having ‘buyer-seller relationship’, join to create a new company. It is an integration of two companies that are working in the same industry, though at a different stage of production and distribution. It can be upstream or downstream, i.e. where the business takes over its suppliers, then it is an upstream merger while if the company extend to its distribution entities, the merger is termed as downstream.
  3. Conglomerate Merger: A type of business integration, in which the merging companies are not related to each other, i.e. neither horizontally nor vertically. In a conglomerate merger, two or more companies operating in different business lines combine under one flagship company. This is further divided into, managerial conglomerate, financial conglomerate and concentric conglomerate.
  4. Co-generic Merger: Co-generic merger is when the companies undergoing merger operate in the same or related industry. However, their product lines are different, as in they do not offer same products but related one. The acquired and target company share similar distribution channels.
  5. Reverse Merger: A merger wherein a publicly listed company is taken over by a privately held company and provides an opportunity, to the private company to go public, without going through the complex and lengthy process of getting listed on the stock exchange. In this type of amalgamation, the unlisted company acquires majority shares in the listed company.

The decision of merger is taken with great planning and analysis considering all the positives and negatives. The sole aim is to accelerate growth and build a good image in the market. It also enhances company’s profitability through economies of scale, synergy, operating economies, entry to new product lines, etc. Further, it removes financial constraints and also minimises financial cost.

However, there are certain restrictions, like high employee turnover, culture conflicts, etc. which might hit the efficiency and effectiveness.

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