Merger of companies

economic-dictionary

There is a merger of companies when two or more independent firms merge into one with the same ownership and management.

As a result of the merger, the partners of the companies involved become partners of the newly merged company. Because the operation does not involve the liquidation of the original companies, the partners do not receive money or goods, but shares of the new entity.

Types of company mergers

The merger of companies can be horizontal or vertical:

  • Horizontal

The merging companies are competitors, that is, they participate in the same market by producing or selling the same good or service. Thus, for example, two manufacturers of breakfast cereals merge into a single new company.

When the merger is horizontal, the number of competitors in the market is reduced so that the intensity of competition falls.This can negatively affect consumers in the form of higher prices, lower quality, or variety. However, benefits can also be generated that could, indirectly, positively impact consumers, such as: cost reduction, greater investment in research and development or more efficient administration.

  • Vertical

The merging companies belong to different links in the production chain. Thus, for example, a merger between farmers and manufacturers of livestock feed.

When the merger is vertical, there is a risk that the merged company will try to close access or increase the cost of its competitors. This can occur when the merged company controls an essential input, that is, one that is necessary for competitors and that they cannot find elsewhere. However, vertical merger can also bring important benefits such as: reduction of transaction costs, improve efficiency or eliminate double margins between supplier and manufacturer.

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