Reasons for Merger: Buyer and Seller Objectives | Strategic Management

Merger Strategies

A merger is a combination of two or more organizations into a single business entity. In a merger, one organization may acquire the assets and liabilities of another organization in exchange for shares, cash, or a combination of both. Alternatively, both organizations may be dissolved, and their assets and liabilities may be combined to create a new organization, with new shares issued to the shareholders.

The terminology may vary depending on the nature of the transaction:

• Acquisition: When one organization acquires another organization, its assets, liabilities, or controlling interest, the transaction is generally referred to as an acquisition from the perspective of the acquiring company.
• Merger: When two organizations combine their operations and resources to form a single entity, the transaction is generally described as a merger.
• Consolidation: When both organizations cease their separate legal identities and combine to create an entirely new organization, the process is known as consolidation.

Example

In the Indian corporate sector, historical combinations such as the integration of Polyolefins Industries Limited with National Organic Chemical Industries Limited (NOCIL) can be cited to illustrate corporate restructuring through the combination of businesses.

Merger strategies are generally adopted to achieve objectives such as business expansion, economies of scale, operational synergies, increased market share, diversification, cost reduction, and stronger competitive positioning.

Types of Mergers

Mergers can be classified into different types based on the nature of the businesses involved, their relationship within the value chain, the customers they serve, and the technologies they use. The major types of mergers are as follows:

1. Horizontal Merger

A horizontal merger takes place when two or more organizations operating in the same business or industry combine with each other. Such mergers are generally undertaken to increase market share, achieve economies of scale, reduce competition, and strengthen the competitive position of the combined organization.

Example: A footwear manufacturing company combining with another footwear manufacturing company.

2. Vertical Merger

A vertical merger takes place when two or more organizations operating at different stages of the same value chain combine with each other. The businesses may not manufacture the same products, but their activities are complementary, particularly in terms of the supply of raw materials, production, distribution, or other inputs.

Example: A footwear manufacturing company combining with a leather tannery that supplies leather to footwear manufacturers.

3. Concentric Merger

A concentric merger takes place when two or more organizations are related to each other through customer functions, customer groups, or complementary business activities, even though they may offer different products or services.

Such mergers enable organizations to leverage common customers, distribution channels, marketing capabilities, or related business competencies.

Example: A footwear company combining with a hosiery company that manufactures socks, as both products serve related customer groups and may use similar distribution channels.

4. Conglomerate Merger

A conglomerate merger takes place when two or more organizations operating in unrelated businesses combine with each other. The organizations are generally unrelated in terms of their customer functions, customer groups, products, or technologies.

Such mergers are often undertaken to achieve business diversification, risk reduction, and expansion into new markets or industries.

Example: A footwear company combining with a pharmaceutical company.

Reasons for Merger

For a merger to take place, two organizations generally have to participate in the transaction—the buyer (acquiring organization) and the seller (target organization). Each organization may have different strategic, financial, and operational reasons for entering into a merger.

1. Why the Buyer Wishes to Merge

The acquiring organization may pursue a merger for the following reasons:

• To increase the value of organizational stock: A merger can create additional value through improved profitability, stronger market position, and operational efficiencies, which may enhance shareholder value.
• To improve the stability of earnings and sales: Combining with another organization can diversify revenue sources and reduce fluctuations in earnings and sales.
• To reduce competition: A merger may help the acquiring organization strengthen its market position and reduce competitive pressure.
• To acquire needed resources quickly: A merger can provide rapid access to valuable resources such as technology, skilled employees, distribution networks, brands, facilities, and market access.
• To take advantage of synergy: The combined organization may generate greater value than the two organizations could achieve independently through cost savings, complementary capabilities, increased revenues, and improved operational efficiency.

2. Why the Seller Wishes to Merge

The organization being acquired may also have several reasons for agreeing to a merger:

• To increase the value of owners' stock and investments: The transaction may provide shareholders with an attractive financial return on their investment.
• To increase the growth rate: Combining with a stronger organization can provide access to additional capital, markets, technology, and managerial capabilities, thereby accelerating growth.
• To acquire resources to stabilize operations: A merger may provide access to financial resources, managerial expertise, technology, or other capabilities required to strengthen and stabilize the business.
• To benefit from tax legislation: Depending on the applicable tax laws and structure of the transaction, a merger may provide certain tax advantages.
• To deal with top-management succession problems: When an organization faces difficulties in finding suitable successors for key managerial positions, a merger can provide access to experienced management and leadership resources.

Thus, the buyer generally seeks strategic and financial benefits from the merger, while the seller may seek value realization, growth opportunities, stability, tax advantages, or solutions to management succession challenges.