Horizontal and Vertical Merger

Horizontal & Vertical Merger

Definition of Merger –

Merger denotes the combination of two or more companies in such a way that only one survives while the other is dissolved. A merger is an investment in a future growth opportunity. When two companies differ significantly in size, they usually merge. For merger, shareholders representing 75 per cent of the value of shares of the target company must approve.

Mergers are normally congeneric where the business interests of the two firms are related. It can be further classified into –

(a) Horizontal Merger

(b) Vertical Merger

Horizontal mergers provide economies of scale while vertical mergers internalize transactions to achieve cost efficiencies.

Horizontal Merger –

In Horizontal merger, the units are in the same business or industry & the resulting increase in market share could lead to a monopoly situation.

Example – Tata Finance Ltd with Tata Industrial Finance Ltd.

A horizontal merger is when two or more companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market.

Examples of horizontal merger in Indian scenario –

1. The formation of Brook Bond Lipton India Ltd through the merger of Lipton India & Brook Bond.

2. The merger of ACC (Associated Cement Companies Ltd) with Damodar Cement.

Vertical Merger –

Vertical mergers are those in which two firms participating at different stages of the production or value chain merge. Companies that do not own operations in each major segment of the value chain may choose to backward integrate by acquiring a supplier or to forward integrate by acquiring a distributor.

An example of a vertical merger is a car manufacturer purchasing a tire company. An example of merger which has the effect of backward & forward product integration is the merger of Reliance Petrochemicals Ltd with Reliance Industries Ltd.

Conglomerate Mergers –

Mergers of firms in unrelated industries are conglomerate mergers. The acquiring company purchases firms in largely unrelated industries. Financial conglomerates have the potential for improved resource allocation, and managerial and concentric conglomerates have the potential for synergy and transfer of managerial capabilities.

Horizontal & Vertical Merger



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