What is Merger?

Merger can be defined as an agreement between two or more existing companies to form up a new company. It is basically the fusion of the two company voluntarily on equal terms and conditions to form a new entity or the company. It can be said that the two companies come together to form new company with new stocks.

Amalgamation is similar as the merger but there is only a slight difference between the two terms, as in Amalgamation two or more company comes together and form a new company with a new name and entity and neither of the merging company survives in amalgamation whereas in merger the name of the merging company survives.

Types of Mergers

There are basically 5 types of merger or categories of merger.

1. Horizontal Merger – A merger between the company that are in the same industry in direct competition in the market with each other in terms of product line and markets. The goal of Horizontal merger is to create a new market entity with more shares because the operation of both the company is the same which can help in manufacturing and cost reduction and exploit merger synergies. 

Example – In 2011, horizontal merger took place between HP (Hewlett Packard) and Compaq as a global technology leader.

• Vertical Merger – A vertical merger takes place when the two companies operate at different levels within the same industry’s supply chain combines their operation. The basic logic behind vertical merger is to create synergies created by merging the company as that would me more efficient. 

Example – In 2002, Ebay an online shopping website merges with PayPal which provides service to transfer money and allow user to make online payment.

• Conglomerate Merger – This is a kind of merger in which two companies engaged in unrelated activity come together to merge. It is also of two kind

Pure conglomerate merger and mixed conglomerate merger, in pure

conglomerate the is nothing in common whereas in mixed company look forward for product extension and market extension.

Example – In 2006, Walt Disney and Pixar mergers.

• Congeneric Merger – Congeneric merger is also known as product extension merger, it is a merging of two or more companies that operates in the same market differently but related product and services. The benefit of this merger is customer reach and increasing profit.

Example – In 1977, the merger between Pizza Hut and Pepsi co. 

• Market extension Merger – In this merger, the companies that sell the same product and service but compete in different market. Companies that engage itself in this market seeks for bigger market base or client base.

Example – In 2002, Eagle Bancshares and RBC Centura merges.

Purpose of merger

Why does companies need to merge? This is the very first question raised in the mind. One of the biggest reason two or more company merge is synergies, here synergy can be described as the value of the two or more merged company exceeding the value of two separate company, therefore it allows the companies to come together as one entity and work efficiently as the were doing previously separately. The merging of two company is done to consolidate companies or the assets of the companies for stimulating growth, increasing market share, gain competitive advantages by eliminating others, influencing supply chains pricing power. Two companies may merge to increase the wealth of their shareholders. It is quite common for some companies to arrange mergers to gain access to assets that are unique or assets that typically take a long time to develop internally. The basic purpose of the merger can be considered faster growth in the corporate area. As for the purpose of saving tax, after merging of the companies the tax can be saved by the all the merging companies as previously they use to pay separately.

What is Demerger?

Demerger can be considered as corporate reconstructing in which a company or a business get divided into several other units as to work on their own or to get liquidated or to get sold out. It can be defined as a splitting up of large company into many small companies. Demerger is a corporate division of a company into smaller businesses, where one separate business is retained by the parent company while the others are either acquired by others, operate independently, are liquidated, or are sold. It helped in the smaller company to support their growth and development phase as well as enable them to focus more sharply on each of the operating businesses.

Types of Demerger

There are basically two types of Demerger, they are named as Spin-off and Split up.

1. Spin-off – It is considered as one of the common ways to demerge a company, in this a parent company receives an equity share in a new company so created equal to their loss of equity in the original company. As the demerger takes place the parent company and the resulting subsidiary company act as separate corporate entity. After demerger takes place, shares can be bought and sold independently. The reason behind the demerger is to attract more investors which can be easily achieved by different independent management. It is considered that after Spin-off, the company worth will be more as independent entity as compare to being part pf the bigger company.

Example – In 2001, British Telecom demerges its mobile phone operations in BT wireless.

• Split Up – In this type of Demerger, a single holding company and some of its subsidiaries are created from one parent company. A company splits up into one or more independent companies by which the parent company cease to exist. After the split into several different entity, the shares are exchanged which are held by the parent company to the new company so formed. It is done where the company has diverse business and one management is not able to manage all the areas therefore different management is also created within the new subsidiaries formed. There is no interference among the management of the subsidiary’s companies.

Example – In 2014, Australian Airlines Qantes Split its international and domestic operation.