Conglomerate Merger

The combination, or “merger,” of two companies that are involved in totally unrelated industries, business activities, or geographic areas, is referred to as a “conglomerate merger.” A popular method of extending a range of products, or growing corporate territory in the 1960s and 1970s, conglomerate mergers rarely result in immediate financial benefits for either company, and so are seldom seen today. To explore this concept, consider the following conglomerate merger definition.

Definition of Merger

Noun

  1. The combination of two or more business entities into a single entity
  2. The combination of two or more corporations involving the transfer of assets to one surviving corporation

Origin

1728   French merge + er

First used in the business sense in 1889, becoming common around 1926

About Corporate Mergers

The corporate merger is a tool used in the strategic management of corporate finances and viability. By buying, combining, dividing, and selling different companies, a corporation can create rapid growth, either in its specific industry, or into new territories, without creating a subsidiary company or child entity, or basically starting a new company.

Five types of corporate mergers exist:

  • Conglomerate merger
  • Horizontal merger
  • Vertical merger
  • Product extension merger
  • Market extension merger

Which term is used to describe any merger depends on the purpose of the transaction, and the end relationship between the companies.

Conglomerate Merger

Conglomerate mergers involve the combination of corporations involved in business activities that are completely unrelated. The two types of conglomerate merger further define the goal of the merger:

  • Pure conglomerate merger – the parties have absolutely nothing in common
  • Mixed conglomerate merger – the parties seek to expand their market regions, or to extend their product offerings

Horizontal Merger

A straight across merger of two corporations operating in the same industry is referred to as a “horizontal merger.” Commonly seen in industries served by few companies, the horizontal merger allows competing companies to reduce competition, resulting in a larger market share for their product or service.

Vertical Merger

When two corporations operating in the same industry, but providing goods or services to consumers at a different level, combine, it is considered a “vertical merger.” For example, the 2000 merger of America Online (“AOL”) and Time Warner created one large company seamlessly providing content to consumers through other companies such as Time Magazine and CNN (previously the domain of Time Warner), as well as via the internet (previously the domain of AOL).

Product Extension Merger

By merging two companies that provide the same products or services in the same market, the resulting company benefits from the combining of products and service of a greater share of consumers. This is known as a product extension merger. For example, the merger of a company that manufactures mobile phone handsets and a company that manufactures Bluetooth hardware and chipsets would result in higher profits for the resulting corporation.

Market Extension Merger

The combination of two companies that provide the same products or services, though in different market regions, is referred to as a “market extension merger.” The resulting corporation would benefit from a larger geographical market area and its larger consumer base.

Corporate Mergers in Action

The corporate world, both in the U.S. and internationally, is always in motion. Corporate mergers of various types are commonly seen, tracked, and anticipated by investors.

Procter & Gamble / Gillette Conglomerate Merger

Procter & Gamble had long held the lion’s share of the market in providing personal care products to women and families. Its 2005 merger with Gillette, the leader in the provision of personal care products to men, led to the creation of one of the world’s largest personal care product companies.

General Electric Multiple Mergers

Thomas Edison formed the company General Electric (“GE”) in 1890, providing lighting solutions. The company soon began engaging in conglomerate mergers, as well as other types of mergers, expanding its product range and geographic market area. The huge conglomerate company that is the modern GE now produces radios, televisions, home and office appliances, wind turbines, and even jet engines. Eventually GE expanded into the arenas of providing television networks, computer hardware, healthcare equipment, oil, gas, and water production, and financial services. Twelve companies that once existed on the stock exchange now exist only as General Electric.

Related Legal Terms and Issues

  • Subsidiary Company – a company whose parent company is a majority shareholder. For example, the Walt Disney Corporation owns 100 percent of the Disney Channel, making the network a “wholly owned subsidiary company.” By contract, the Walt Disney Corporation owns only 40 percent of the History Channel, making it an “affiliate company.”

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