Merger refers to a friendly joining together of two organizations as in a corporate marriage, usually with the sanction of both firm's top strategic decision makers. Mergers are usually based on the core competencies of firms. For example, two companies with similar core competencies (e.g., in marketing) in marketing may merge to strengthen their overall competitive position. Alternative, two firms may merge to combine complementary core competencies. For example, a firm possesses a competency in its marketing may merge with a firm that has good brand name. The overall reason for a merger is to take advantage of benefits of synergy.
Acquisition usually implies and unfriendly or hostile takeover without the sanction of the acquired firm. Acquisitions may be either horizontal or vertical.
The following paragraphs discuss three kinds of horizontal takeovers and two types of vertical acquisitions.
Horizontal integration involves expanding into the same line of business. There are several reasons for engaging in horizontal integration. Some of these are:
- One of the primary reasons is to increase market share. Along with increasing revenues, larger market share provides the company with greater leverage to deal with its suppliers and customers. Greater market share should also lower the firm's costs through scale economies.
- Increased size enables the firm to promote its products and services more efficiently to larger audience and may permit greater access to channels of distribution.
- Finally, horizonal integration can result in increased operational flexibility.