What are Mergers?

Learn about Mergers with Hrithik Roshan

Case breakdown: Movie Yaadein

The scene that you saw shows how Ronit (played by Hrithik Roshan) is questioning the investors who are attending the Globex International Merger between two business houses. These two family businesses also decided to marry their kids so that their business can grow even further.

Monishka (played by Kiran Rathod) is also agreeing with Ronit when she says business merger doesn’t entail marriage which is based on cash flow rather should be based on true love.

In this blog, Learning Perspectives explore the meaning of Mergers.

What are Mergers?

When two or more companies join together, it is referred to as a merger. This leads to significant changes in the organizational structures and internal functioning. Merger is a form of corporate restructuring. Many other activities such as acquisitions, leverage buyouts, performance improvement initiatives etc. also form part of corporate restructuring. Merger may involve absorption and consolidation. It is mainly done by companies to increase their market share.

Absorption as the name suggests, means one company acquires another company. While Consolidation means, two companies combine to form a new company.

Types of Mergers:

Horizontal Merger:

This merger represents a merger of firms engaged in the same line of the business/industry.

Vertical Merger:

A merger of firms engaged at different stages of production in an industry. For example: Merger of a company called ONGC (Oil and Natural Gas Corporation), a company engaged in oil exploration and production with a company HPCL (Hindustan Petroleum Corporation Limited), company engaged in refining and marketing may improve coordination and control.

Conglomerate Merger:

This merger deals with a merger of firms engaged in related lines of business. For example: ITC is one of the biggest conglomerate spanning hotels, paper boards, agricultural products and FMCG or the fast moving consumer goods.

Reasons for Mergers:

There are many reasons when two companies decide to join together. These are related to growth, diversification, economies of scale, managerial effectiveness, lower financing costs and so on.

Strategic benefit:

If a firm has decided to expand in a particular industry, sometimes look for merger & acquistion which offers several strategic advantages. It offers special timing advantage because the merger enables a firm to leap several stages in the process of expansion. It may also be advantageous in terms of cost and risk.

Get leads. Get sales. Get growing.
Economies of Scale:

To Widen the scope of activities and skills/assets, many firms decide to merge. For example: P&G can enjoy economies of scale if it acquires a consumer product company that benefits from its highly regarded consumer marketing skills.

Complementary Resources:

If two companies have complementary resources, it makes sense for them to merge. For example: a startup which has innovative product would not have marketing capabilities of a bigger firm in the same industry. These two can decide to merge to successfully use each others’ resources and have a bigger market share.

Recent Example:

Zomato recently was looking to be merged with Grofers. Zomato, a food delivery app was looking to explore new public markets. Grofers is a online grocery e-retailer, which touched the $1 billion club recently. Zomato acquired 9.16% stake in Grofers. This deal will help Zomato to come back into the grocery segment.

Written by : Ms. Gitika Chandra

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