If acquisitions are the fun and sexy guy with a flashy sports car, then mergers are the boring and stable guy that drives a sensible sedan. While acquisitions garner headlines for boldness and bravado, mergers are much more refined, sensible, and logical.
First, let’s look at the word. The first appearance of the word merger, meaning ‘to extinguish by absorption’ appears in 1728, used in a legal sense.
Stemming, of course, from the word ‘merge’, merger is part of a class of Anglo-French legal words that are infinitives used as nouns – legal verbs that were “nouned” when the actual action became known as the process.
By the 1880s, the word usage had gone beyond the strict legal interpretation, and, though it didn’t become a common business term until the 1920s, its first business usage comes from 1851, from the United States Supreme Court Reports: “The moment, then, the stock was destroyed by the merger of that company in another,..its distinctive character was destroyed.” And the mergers and acquisitions phrase is first recorded in The Journal of political economy from 1941: “In the second period there was a similar wave of mergers and acquisitions, causing the disappearance of many concerns in manufacturing.”
Contrary to acquisitions, which see one company essentially purchase a smaller company, a merger is when 2 companies reach an agreement to join together and become a single company – much like marriage for an individual.
While there is only one type of marriage, there are 5 different classifications of mergers, depending upon the reason for merging. They are:
- Horizontal: This is the easiest form to understand, when 2 similar companies in the same industry merge to expand market share.
- Market Extension: If 2 companies sell the same products in different markets, combining will give them access in both markets.
- Product Extension: Some products are different but compliment each other, like ketchup and mustard or coffee and a pastry.
- Vertical: Thanks to technology, we all understand that different components go into making a finished product. For example, this would be like the maker of your computer merging with a company that produces hard drives or RAM.
- Conglomerate: The oddest of the group, this involves the merger of companies who really don’t have anything in common – think of the “they own THAT?” examples of Bayer AG, LVMH, Procter & Gamble, and Berkshire Hathaway.
Again using the marriage analogy, not all mergers “live happily ever after”.
For all but the horizontal mergers, there are often different industry dynamics and structures to consider when merging 2 companies, especially if they are of considerable size.
While some display the perfect harmony of Exxon and Mobil or Disney and Pixar, there are also some that just don’t work out, such as Daimler Benz and Chrysler or AOL and Time Warner. Still, unless you are directly involved in it, considering the dynamics and give-and-take involved mergers- and most marriages- they definitely are interesting to watch.