What Is a Merger? (Plus Benefits and Types)

By Indeed Editorial Team

Published 16 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A merger is a large-scale, mutually beneficial business deal. It can be one of the most effective ways to increase a company's productivity and profits. If you're researching a career in business or expect to experience a company merger in the future, you may be interested in learning about the individual components of a successful merger. In this article, we answer the question, "What is a merger?", list the benefits of mergers, share what to expect when a company goes through a merger, discuss the different types of mergers and explain the difference between a merger and an acquisition.

What is a merger?

To answer the question "What is a merger?", a merger is an agreement in which two companies come together to form a single company. This type of consolidation occurs when the leaders of both companies determine that it's in their mutual best interests to combine their operations, resources and leadership to form a new, single entity. Mergers offer a way for both companies to grow, gain market share or expand into new markets.

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Benefits of a merger

Merging companies can bring several benefits to those involved with the business. Some of the benefits relate to how the company can interact with and serve its clients, while others improve efficiencies for employees. Here are some of the benefits that can come with mergers:

  • Lower labour costs: A merger can result in multiple employees doing the same job at each individual company. By coming together and removing extraneous employees, a company can reduce its overall labour costs while maintaining stronger, more effective employees.

  • Increased overall performance efficiency: By combining business activities, companies can boost their overall performance efficiency. They can also reduce their across-the-board costs, as each company leverages off of the other company's strengths.

  • Increased market share: When two companies that provide similar products or operate in the same industry come together, the newly formed company can enjoy a greater market share, gaining access to the resources that both bring to the business deal.

  • Enhanced distribution capacities: A merger may expand an organisation geographically, which may improve its ability to distribute services or goods on a wider scale.

  • More financial resources: All companies involved in a merger pool their financial resources, which can increase the overall financial capacity of the new company. A new investment opportunity may emerge or the company may be able to reach a wider audience with more significant inventory capabilities or a larger marketing budget.

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What to expect when a company goes through a merger?

Here are the things you can expect when a company goes through a merger:

  • Culture clash: If you're an employee of the selling or target company, you're expected to understand the new management structure, operating system and corporate culture.

  • Job losses: A merger may result in job losses. Most of this is attributable to redundant efforts and operations to boost efficiency.

  • Higher rate of pay: When your current employer merges with another company, it may create a more stable company, which can help you feel more secure in your job. When the merger results in a more financially stable company, you might receive a higher rate of pay.

  • Stock price appreciation: Your employer's stock price could increase substantially if the buying company offered a higher stock price than where your employer's stock was trading before the deal. This can help you earn capital gains on any shares that you own.

  • Manager apprehension: A merger can bring about a change in the relative power of certain roles. For example, a manager who was once a leader on a small team may find themselves with layers of new superiors.

  • New job opportunities: In the same way a merger can eliminate the need for some departments or jobs, it can create positions that might fall under your skill level. The advantage here is that you may find yourself qualified for a role you may not have expected quite so soon.

  • New training and procedures: The new company may require employees to undergo new training to ensure that the employees of the merging companies are in sync. A new procedure can be a disadvantage to you, as it means relearning a job you've already grown accustomed to doing.

Related: Different Types of Employee Training Programmes and Methods

Types of mergers

There are five distinct types of mergers, each of which serves a unique purpose:

Product extension

A product extension is a merger that involves two businesses that already operate in the same industry. They have some overlap in their marketing strategies, product development process, research practices and technology. In the event of a product extension merger, goods or services from the original companies are now manufactured by the merged company. The new company has access to a wider client base, a new team of specialised personnel and an enlarged research archive.

A product extension merger often takes place between businesses whose products already complement each other. For example, a photo editing mobile application merges with a social media platform. Combining these products may allow for technology integration and may ideally combine the respective client bases.

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Conglomerate

A conglomerate merger is the combination of two firms that are involved in unrelated business activities. The firms may be in two separate locations or different industries. A conglomerate has two types. These include a pure conglomerate, which involves two companies that truly have nothing in common; and a mixed conglomerate, which happens when companies stand to gain market or product extensions through a merger.

Typically, companies only merge if they expect their shareholders to make a profit from the deal. That's why they carefully negotiate these kinds of mergers. One example of a conglomerate merger is a paper products company that merges with a fashion accessory brand. The new company may still face the same competition as before but may benefit from its newly increased resources.

Market extension

Market extension mergers are deals that occur between companies that sell the same products but in different markets. When companies initiate a market extension merger, they gain access to a bigger market and a more diverse customer base. For example, a soft drink company based in Hong Kong merged with a soft drink company in Taiwan. This merger can help the newly formed company to sell its goods in both countries without the cost of securing international vendors, training new employees or opening new facilities.

Vertical

Vertical mergers are when businesses that operate at different stages of a production chain combine. They likely produce different parts or services that contribute to a finished product. A vertical merger is profitable when both companies agree to unite their equipment, facilities and staff for increased productivity. A vertical merger can reduce production costs, streamline product development processes and decrease financial waste. An example of a vertical merger is an email provider merging with a media conglomerate. This deal can centralise interdepartmental communication, consolidate marketing efforts and create a more cohesive brand.

Mergers can be a profitable business decision for a variety of companies in a multitude of situations. If both companies stand to benefit, a merger can be an important step in increasing productivity and market value. Mergers can be risky because, to facilitate a mutually beneficial merger, it's important for both companies to have the willingness to negotiate and compromise. If the new company has increased profits, greater reach and is a more influential competitor in its industry, the merger can be considered a success.

Horizontal

This type of merger takes place between two companies that operate in the same industry. Frequently, a horizontal merge involves two competitors who choose to join forces. In an industry with fewer brands, companies that provide the same products or services might find it mutually profitable to merge. Creating a new company with a larger target market and more resources can significantly increase shareholder value in this instance. For example, two automobile manufacturers merge to outsell their competitors. A horizontal merger often involves rebranding, a revision of company policies and perhaps a redesign of production facilities.

What is the difference between a merger and an acquisition?

Mergers and acquisitions involve some similar concepts and considerations, but there are several important differences:

Merger

A key difference between mergers and acquisitions involves the idea of brand identity. In a merger, two parties join together and cease to exist as individual entities in the process. Instead of retaining their unique identities, they create a new name and brand that includes both companies. Mergers are usually designed to mutually benefit both parties, with each increasing their value by becoming one. In a merger, instead of one company taking over the other, both companies make sacrifices to increase their profits and influence.

Acquisition

Acquisitions are not mutually beneficial. They usually involve one company purchasing another and assimilating its assets. In this case, the acquired company often loses its identity and melds with the acquiring business. As a whole, acquisitions are purchases rather than agreements. The acquiring company typically buys out the other company's outstanding stock to complete the transaction.

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