A merger is the combination of two companies into one by either closing the old entities into one new entity or by one company absorbing the other. In other words, two or more companies are consolidated into one company.
A merger is a financial activity that is undertaken in a large variety of industries – healthcare, financial institutions, private investments, industrials, and many more.
Types of Merger
(1) Horizontal Mergers – A horizontal merger calls for the uniting of two or more firms in the same field. In our examples, the best one is that of A.C.C. that took place in 1934.
(2) Vertical Mergers – Vertical merger refers to the integration of companies having supplementary relationships either production or distribution of products and services or both. The amalgamation of Mafatlal Industries Ltd. (MIL) and Mafatlal Fine Spinning and Manufacturing Ltd. (MFL) is an example of this kind.
(3) Circular Mergers – A circular merger involves the bringing together of production or services that are unrelated but marketed through the same channels allowing shared dealership. The case of merger of McLeod Russel (a tea company) with Eveready Industries (batteries) illustrates the circular rationale for merger.
(4) Conglomerate Mergers – Conglomerate merger means the unification of different kinds of businesses under one flagship company. This is more or less similar to vertical integration. There are countless examples of such mergers. These business houses go on taking over other businesses. It is Godrej, Tatas, HLL, Reliance Industries, Mafatlal, Delhi Cloth Mills, and so on. HLL, merger with TOMACO in 1994, Brooke Bond Lipton India in 1996, Kissan Kwality in the same year are the examples of this kind.
Steps in Successful Merger
(1) Draw up a Separate Plan and Program of Merger – The persons of the both units merging and merged should design a plan and chalk out a programme that ensures smooth transition from pre-merger to the post-merger stage. This plan should clearly state the merger objectives particularly those which relate to earnings. These should be breakup picture as to what are the gains to the stake holders of both the units. There should be analysis of strengths and weaknesses and key performance factors for both the combining units.
(2) Clarification and Re-alignment of Executives – It should be clarified as to the proposed merger does not pose any threat to the present management team. The fact that the future management – particularly of merged-will be protected and made more competent. It is these executives who are to complete the process of merger. Whatever managers do, they will be doing so in the best interest of new born firm. It is these persons who are to smell and anticipate and trashout with one another which leads to creation of a climate of mutual trust.
(3) Create Effective Management Information System – There is need for effective management information system that is responsible for two way communication arrangement where each one responsible for planning and implementation will be getting adequate, timely and clear information for making decisions. The top management has to exercise control over the planned merger. Both for planning the merger and structuring the organisation can not be done without people because organisation and organisational efforts are for people. In other words people are key to the planning and execution of merger which is made comparatively easy with flow of information.
(4) Bring About Complementary Merger – Merger is merger of merged company and merging company. Generally, the combination or merger occurs when their aims are coinciding like a lock and key, cup and saucer, male and female which are made for each other. That is merged firm is planning to attain high growth prospects and fruits of it which it is not getting present. Again, the merging company has currently good growth prospects but not very much happy and looking for another to join its hands. In effect, the synergistic benefits turn to be positive when one is doing in some areas of business very well and another is doing very well where the first is weak.
For instance, firm A is having very strong production facilities but not equally good in marketing. Firm B is very good in marketing area and not so good in production area. In case, these two companies merge, there will be perfect synergy created resulting in positive benefits that two and two will be more than four. This creates a situation that dovetails the resources and compatibility for mutual long standing gain.