Answer:
Depending on the kind of combination between the companies Mergers and Acquisition can take several forms. They are categorized as follows:
1. Horizontal: It is a merger of two competing firms which are engaged in the production of similar products or are providing similar kind of services. The acquiring firm belongs to the same industry as the target company. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities, widening the product line, reduction in investment, elimination of competition in product market, increase market share, reduction in advertising costs etc.
Examples are:
(a) PHOENIX ELECTRIC (INDIA) merged with PHOENIX LAMPS (INDIA).
(b) VIDEOCON NARMADA ELECTRONICS merged with VIDEOCON INTERNATIONAL LTD.
(c) BANK of MADURA merged with ICICI.
(d) Acquisition of BLUE DART by DHL WORLDWIDE.
(e) Acquisition of THOMSON SA of France by VIDEOCON INDIA. Deal was worth $ 290 million.
2. Vertical: When two or more companies involved in different stages of activities like production or distribution combine with each other the combination is called Vertical merger.
An example can be the combination of a car manufacturing company and the company manufacturing a major component like piston (that is generally bought from others and used by the car manufacturing company). The acquiring company through merger of another company attempts to reduce of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital requirements.
There are two types of vertical combinations.
(a) Forward Integration: In this kind of vertical combination a manufacturer combines with its customer. For example when a TV manufacturer combines with a TV marketing company this is called forward integration.
(b) Backward Integration: In this kind of vertical combination a manufacturer combines with the supplier of the raw material. For example the combination of car manufacturing company with piston manufacturing firm would be a backward combination.
In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.
The following are some of the benefits which accrue from the vertical combination to the acquirer company:
(a) Company can safeguard the source of supplies of raw materials or intermediary product.
(b) Company is able to get the benefits of savings in transportation costs, overhead costs in buying department, etc.
(c) Company has control over product specifications.
3. Circular Combination: Companies engaged in the production of different products seek combination to share common distribution and research facilities in order to obtain economies by elimination of duplication of cost. The acquiring company obtains benefits in the form of economies of resources sharing. Another major advantage is to achieve diversification.
Examples are:
(a) STANDARD EQUITY FUND merged with DR. REDDY’S LABORATORIES.
(b) KARNATAKA SCOOTERS merges with BROOKE BOND (INDIA) LTD.
4. Conglomerate: It is the combination of companies engaged in unrelated businesses. The basic purpose of such a combination is lowering of cost of capital, optimum utilisation of financial resources and enlarging debt capacity.
Conglomerates are used to smooth out fluctuation in the earning from different businesses. The main idea is to diversify and as we all know diversification is done in order to minimise the risk associated with the different activities.
A typical example would be the merging of a cement company, an electronics company, a finance company and a garment manufacturing company. A real life example is Voltas Ltd.
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