Tuesday, February 25, 2014

Horizontal, Vertical and Circular Mergers

From a legal point of view, a merger is the legal consolidation of two companies into one entity,  whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner.
In management practice the distinction between a merger and an acquisition has become increasingly 'blurred' in several respects.
What types of mergers can be distinguished?
  • Horizontal merger: involves firms performing the same activities/functions in the same supply chain. Both firms are in the same line of business. By buying the competitor, the acquiring company is reducing the competition in the marketplace.
  • Vertical merger: involves firms performing different activities/functions in the same supply chain. The acquiring firm buys buyers or sellers of goods and services to the company.
  • Circular merger: involves firms with different products but similar distribution channels. It is a transaction to combine 2 or more companies operating within the same market, but offering a different product mix. The aim is to increase the product and service offerings within the target market.

Reasons Why Mergers Fail | M&A Failure Reasons

A merger can be defined as the union of two or more organizations under single ownership through the acquisition by one organization of the assets or liabilities of the other.
Even if mergers and acquisitions can be an excellent way of increasing and protecting marketshare, this strategic approach does not always deliver what is hoped for in terms of increased profitability or economies of scale.
Typically mergers and acquisitions aim for synergy. But merely recognizing potential synergy areas does not guarantee that they will actually be realized by combining two firms.
Typical reasons for merger failure include:
- Viewing M&A only as a financial, strategic activity, ignoring soft issues such as people, resistance to change and company cultures. When left completely unattended, this may lead to acts of sabotage and petty theft, increased stuff turnover rates, and increased absenteeism and sickness rates. But any merger team is likely to face difficulties of merging the two company cultures, departure of key people and demotivation of remaining employees.
- Spending too much energy and time on dealmaking instead of post-merger planning.
- Payment of an overinflated price for acquired company.
- Poor strategic fit.
- Failure to achieve potential economies of scale due to poor management.
- Unpredicted changes in the external environment.
Without proper preparation, in particular post merger integration planning, mergers will not achieve their true potential.