Horizontal Mergers

Horizontal mergers happen when a company merges or takes over another company that offers the
same or similar product lines and services to the final consumers, which means that it is in the same
industry and at the same stage of production. Companies, in this case, are usually direct
competitors. For example, if a company producing cell phones merges with another company in the
industry that produces cell phones, this would be termed as horizontal merger. The benefit of this
kind of merger is that it eliminates competition, which helps the company to increase its market
share, revenues and profits. Moreover, it also offers economies of scale due to increase in size as
average cost decline due to higher production volume. These kinds of merger also encourage cost
efficiency, since redundant and wasteful activities are removed from the operations i.e. various
administrative departments or departments suchs as advertising, purchasing and marketing. For e.g.,
in the banking industry in India, acquisition of Times Bank by HDFC Bank, Bank of Madura by ICICI
Bank, Nedungadi Bank by Punjab National Bank etc. in consumer electronics, acquisition of
Electrolux’s Indian operations by Videocon International Ltd., in BPO sector, acquisition of Daksh by
IBM, Spectramind by Wipro etc

Vertical Mergers

A vertical merger is done with an aim to combine two companies that are in the same value chain of
producing the same good and service, but the only difference is the stage of production at which
they are operating. For example, if a clothing store takes over a textile factory, this would be termed
as vertical merger, since the industry is same, i.e. clothing, but the stage of production is different:
one firm is works in territory sector, while the other works in secondary sector. These kinds of
merger are usually undertaken to secure supply of essential goods, and avoid disruption in supply,
since in the case of our example, the clothing store would be rest assured that clothes will be
provided by the textile factory. It is also done to restrict supply to competitors, hence a greater
market share, revenues and profits. Vertical mergers also offer cost saving and a higher margin of
profit, since manufacturer’s share is eliminated.

or

1. One is when a firm acquires another firm which produces raw materials used by it. For e.g., a
tyre manufacturer acquires a rubber manufacturer, a car manufacturer acquires a steel
company, a textile company acquires a cotton yarn manufacturer etc.
2. Another form of vertical merger happens when a firm acquires another firm which would
help it get closer to the customer. For e.g., a consumer durable manufacturer acquiring a
consumer durable dealer, an FMCG company acquiring m advertising company or a retailing
outlet etc.

Conglomerate merger

Conglomerate merger: It refers to the combination of two firms operating in industries unrelated to
each other. In this case, the business of the target company is entirely different from those of the
acquiring company. For e.g., a watch manufacturer acquiring a cement manufacturer, a steel
manufacturer acquiring a software company etc. The main objective of a conglomerate merger is to
achieve i big size.
Concentric Mergers

Concentric mergers take place between firms that serve the same customers in a particular industry,
but they don’t offer the same products and services. Their products may be complements, product
which go together, but technically not the same products. For example, if a company that produces
DVDs mergers with a company that produces DVD players, this would be termed as concentric
merger, since DVD players and DVDs are complements products, which are usually purchased
together. These are usually undertaken to facilitate consumers, since it would be easier to sell these
products together. Also, this would help the company diversify, hence higher profits. Selling one of
the products will also encourage the sale of the other, hence more revenues for the company if it
manages to increase the sale of one of its product.

Forward merger

In a forward merger, the target merges into the buyer. For e.g., when ICICI Bank acquired Bank of
Madura, Bank of Madura which was the target, merged with the acquirer, ICICI Bank.

Reverse merger

In this case, the buyer merges into the target and the shareholders of the buyer get stock in the
target. This is treated as a stock acquisition by the buyer.

Subsidiary merger

A subsidiary merger is said to occur when the buyer sets up an acquisition subsidiary which merges
into the target.

LEGAL TERMINOLOGY

Sale of Majority of Assets

In a merger / acquisition of one by another company, one company buys out the majority of assets
of the other company. The control is transferred to the acquirer after approval of majority of
shareholders of the target company. The acquirer usually only takeover liabilities that are attached
to the purchased assets, which means that other liabilities are retained by the target company and
paid off by them through their own means. Acquirer may, at times, decides to take up liabilities too.
Shareholders have the same rights after the merger, since they are entitles to a divided, which is
usually higher after the merger.

Stock for Assets

In this type of transaction, one entity buys outs the other one for a certain number of shares. The
target company dissolves, passing all its assets to the acquirer. The control is established after
approval from acquirer Company’s management. For the target company, vote of approval from
majority shareholders is required for the dissolution. All the liabilities attached to the assets of
Target Company are passed on to the acquirer company, while all other liabilities are retained by the
target company unless acquirer volunteers to take them on as well. Shareholders after the merger
are likely to receive a higher dividend.

Stock for Stock

Stock for stock transaction involves two companies, where one entity buys shares in another
company from its shareholders. The target’s company’s assets are passed on to the acquirer, while
the target company is run as a subsidiary of the acquirer. A new stock has to be created for this kind
of merger, which means that the majority of the acquirer company’s shareholders are required to
approval the merger. The shareholders of the target company are able to individually decide
whether they want to participate or not. The merger entails limited liabilities for the acquirer in
terms of target’s company liabilities. If shareholders decide not to sell their shares, they might be
frozen out.

Merger/Consolidation

This kind of transaction requires the presence of two companies. One company purchased the other,
or alternatively both dissolve and become a new company. In this case, both companies require
approval from majority of shareholders. The company or the acquirer takes up all rights and all
liabilities, some of which are unknown to both corporations. Shareholders retain the right to receive
dividends, in addition to retaining dissenter’s appraisal rights. This is the most common sort of
merger, which basically means that one company is absorbed into the other one. Assets are taken
over, while liabilities are cleared at the time of the merger or takeover the acquirer.

Dissolution

Dissolution involves only one corporation, since the company is being dissolved. If the company
wants to dissolve voluntarily, it needs the majority vote by shareholders in addition to filing with the
state. At times, courts order involuntary dissolution in certain cases such as a deadlock situation. The
control is usually held by majority vote by shareholders. In the case of dissolution, all liabilities must
be cleared, although any future liability is absolved. Dissolution usually means that the company
does not exist anymore, which means its operations are wrapped up during the process dissolution.

Freeze-Out

In this case, the majority shareholders attempt to buyout the shares of the minority of shareholder.
Only one company is involved, and control is defined by the majority through board approval. The
liabilities in this case remain with the company as there is no other party involved. This is mostly
done to reaffirm control by the majority shareholders over the operations of the company, since
they face no obstacles once the deal goes through.

Tender Offer

This merger is similar to stock for stock, the only difference being the shareholders are offered
money in exchange for their shares, after which the target company is dissolved, merged or run as a
subsidiary. Management approval is needed since the acquirer usually borrows to finance the
merger. While individual shareholders of Target Company may sell at their will, although a
controlling percentage of target company’s shared is required for this mergers. After the purchase of
shares, the acquirer has limited liability in terms of target’s company financial obligations. After the
merger, shareholders can expect a higher dividend, while shareholders of target have no right, since
they are no hold shares.
Triangular Merger

As the name suggest, this merger involves three companies. The first step involves the acquirer
company forming a subsidiary, whose only assets are shares of the parent company. The newly
formed subsidiary then does a stock for assets or stock for stock as explained above with the target
company. Consequently, the target company mergers or completely dissolves.