Question

3. (15 pts) What are the three types of merger? For each type, define such, and give one reason or justification for that type of merger.

Answer 1

The three important type of mergers are

1. Horizontal Merger

In horizontal Merger companies which are at the same level in the industry are merged. These are the firms which are in competition with each other in selling the same good or service. Eg: merger of two airline companies.

This type of merger could occur when companies want to gain a higher share of market or when they want to achieve economies of scale. These could mean a higher share of profit.

The next type of vertical merger.

2.Vertical merger

in vertical Merger the forms at different levels of the same industry are merged that is they sell different products but are a part of the same industry.

Eg: A car selling company merging with a wheel(tyre) selling company.

One of the reasons of this type of merger is that it would lead to more effective production and an increased quality of goods which would provide firm an edge over the other firms.

The next type of merger is conglomerate merger.

3. Conglomerate Merger

in this type of merger the forms belonging to different industries of selling different goods merge.

Eg: a steel making firm merging with a computer manufacturing firm.

The major in reason behind this type of merger is that it leads to diversification of risk as the company or firm is investing in different types of goods which are unrelated to each other and hence would reduce the risk when one type of industry is slowing down.