A merger occurs when two different corporations come together to form an entirely new company. In theory, a merger is different from an acquisition, in which one company buys the other one and integrates it into its operations. A merger is supposed to be more of a coming together of equals, but it is rare for each of the two companies to be on a completely equal footing. To help prevent litigation from arising, it’s wise to consult with a lawyer, like the team at Silverman Law Office, PLLC as the merger proceeds.
Nevertheless, the term “merger” may be used as a show of respect to the former owners and employees of the other company. A merger usually involves two companies that relate to one another in some way. As a commercial litigation lawyer explains, the connection between the two companies’ products and operations determines the type of merger that takes place.
#1 Concentric Merger
A concentric merger occurs between two companies that provide different goods or services to the same customers. From the customers’ point of view, this results in “one-stop shopping.” For the new company formed by the merger, it means expanding offerings beyond what either provided before. An example of this type of merger would be a new party planning company that formed from the combination of a former party equipment rental and a former catering service. After the merger, customers can receive both services from the same company, potentially paying less than it would cost to rent party equipment and hire a caterer separately.
#2 Vertical Merger
A vertical merger occurs between two companies that offer the same product at different stages of production. In other words, one company supplies the raw materials from which the other manufactures products. Merging the two companies means eliminating redundant functions, which can result in cost savings. This gives the manufacturer ready access to the raw materials, saving a step in the process and possibly preventing disruptions. The result of the merger is synergy, or different operations working together toward a common goal.
#3 Horizontal Merger
When two companies that perform similar services to the same types of customers come together, this is called a horizontal merger. The new company that results is similar to the two that came together to form it. Like a vertical merger, a horizontal merger can reduce costs by eliminating redundancies. Another advantage of a horizontal merger is that the new company does a greater volume of business which results in an increased market share for the new company.
Mergers can be mutually beneficial for the two companies involved. However, because they have the potential to decrease competition, the government often has to approve them. Attempting to go about a merger without legal guidance can cause serious disagreements to develop, which goes against the entire goal of a merger in the first place. Consider speaking with a lawyer about the feasibility of merging your company with another and the legal requirements you have to meet.