Expanding Through Acquisition and Merger
The need for expansion of business drives companies to acquire business of the same line or a line different from the one of the company seeking to expand. In recent years we have witnessed several such acquisition deals. This process of acquisition or take-overs are implemented in a variety of transactions. There are several ways in which a company can be acquired by another company or firm. In a typical merger, the board of directors of two entities agree to combine and shareholders' approve or disapprove of the resolution put forward before them. If the resolution is carried the target company goes out of existence merging its entity into that of the acquiring firm. This is how Compaq absorbed Digital Computers. There are various types of mergers and each having it own characteristics which may be described as follows:
Horizontal Merger: Merger of two or more companies which are in direct competition and have identical product lines and operate almost in the same market , could be termed as horizontal merger.
Vertical Merger: Vertical mergers take place in the form of expansion backward or forward in the same industry. Thus a typical example of a vertical merger is a merger of a customer with the company or a supplier and the company.
Market-Extension Merger: A merger may be intended to extend and expand the existing market by acquiring the existing and growing market of another company. This kind of merger mostly takes place between entities which market products of the same or related kinds.
Product-Extension Merger:When mergers are effected between two or more companies with the sole intention of marketing different products in the same market, these could be cited as instances of product-extension mergers.
Pure Conglomerate Merger:When two or more companies which share no common business areas decide to merge with each other , this kind of merger is known as pure conglomerate merger.
Purchase Mergers:This kind of merger takes place when one company purchases another which is made with cash or through the issue of some kind debt instruments. The sale proceeds are subject to Income Tax. This route is preferred by the acquiring company as it results in some tax benefits.
Consolidation Mergers:Under this kind of merger, a brand new company is formed with both the companies merging into it and tax benefits are almost the same as in a purchase merger.
Besides the categories mentioned above, there is another class of acquisition which is characterized by an act of acquisition by the own management of a company or by a group of investors which are known as management buyouts, if managers are involved. When such an acquisition is funded through debt predominantly it is known as leveraged buyouts.
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