What is merger?

“Merger" refers to the combination of two or more companies into a single entity. This
process can help companies increase their market share, reduce competition, and achieve
greater efficiencies.

Horizontal Mergers
A horizontal merger is a type of merger where two companies operating in the same industry
and often direct competitors combine their operations. This type of merger is typically aimed
at achieving economies of scale, increasing market share, reducing competition, and
expanding the product or service offerings of the combined entity.
Key points about horizontal mergers:
 Same Industry: The companies involved are in the same line of business.
 Competition Reduction: It reduces the number of competitors in the market.
 Economies of Scale: Can lead to cost savings through streamlined operations and
increased production efficiency.
 Market Power: Can increase the market power of the combined company, potentially
allowing for greater pricing power.
 Regulatory Scrutiny: Often subject to antitrust laws and regulatory approval to
ensure the merger does not create unfair monopolies.

Examples of horizontal mergers include the merger of Disney and 21st Century Fox in the
media industry, and the merger of Exxon and Mobil in the oil industry.

Vertical merger
A vertical merger is a type of merger where two companies operating at different stages of
the production process for a specific product or service combine their operations. This
integration typically involves a company merging with its supplier or distributor.
Key points about vertical mergers:

 Different Production Stages: The companies involved operate at different levels of

the supply chain.
 Supply Chain Efficiency: Can lead to increased efficiency and cost savings by
streamlining the production process and reducing dependency on external suppliers or
distributors.
 Improved Coordination: Enhances coordination between different stages of
production and distribution.
 Market Control: Helps in gaining better control over the supply chain, potentially
leading to more consistent quality and reduced risks of supply disruptions.
 Barriers to Entry: Can create barriers for new entrants by controlling more of the
supply chain.

Examples of vertical mergers include:

 Amazon and Whole Foods: Amazon, an online retailer, merged with Whole Foods, a
grocery chain, integrating retail and distribution.
 Google and Motorola Mobility: Google acquired Motorola Mobility to integrate
hardware manufacturing with its software development.

Conglomerate Mergers
A conglomerate merger is a type of merger where two companies that operate in entirely
different industries or business activities combine their operations. These mergers are
typically driven by the desire to diversify business interests, reduce risks, and increase market
power by entering new markets.

Key points about conglomerate mergers:

 Different Industries: The companies involved are in unrelated business activities.

 Diversification: Helps the combined entity diversify its revenue streams and reduce
dependency on a single market or product line.
 Risk Reduction: By operating in different industries, the company can mitigate risks
associated with market volatility in any one sector.
 Resource Utilization: Allows for better utilization of financial resources and
management expertise across different business units.
 Potential for Synergy: While less common than in horizontal or vertical mergers,
there can still be opportunities for operational or financial synergies.

Examples of conglomerate mergers include:

 Berkshire Hathaway: Warren Buffett's conglomerate, which owns a wide array of

businesses across different industries, such as insurance (GEICO), railroads (BNSF),
and consumer goods (Duracell).
 Procter & Gamble and Gillette: Procter & Gamble, a consumer goods company,
merged with Gillette, a razor and personal care products company, expanding its
product range into new categories.

Divestiture meaning
A divestiture is the process by which a company sells, liquidates, or otherwise disposes of a
business unit, subsidiary, or asset. This action is often taken to streamline operations, raise
capital, focus on core activities, or comply with regulatory requirements.

Key points about divestitures:

 Streamlining Operations: Helps companies concentrate on their core businesses by

shedding non-core or underperforming units.
 Raising Capital: Generates funds that can be reinvested in other areas of the business
or used to pay down debt.
 Regulatory Compliance: Sometimes required by regulatory authorities to maintain
market competition and prevent monopolistic practices, particularly following
mergers and acquisitions.
 Strategic Repositioning: Allows companies to adapt to changing market conditions
by divesting parts of the business that no longer align with strategic goals.
 Improving Financial Health: Can enhance a company's financial performance by
removing less profitable or loss-making divisions.

Examples of divestitures include:

 General Electric (GE): GE has engaged in several divestitures, including selling its
financial services arm, GE Capital, to focus more on its industrial core businesses.
  Pfizer: Pfizer divested its consumer healthcare business to GlaxoSmithKline (GSK)
to concentrate on its core pharmaceutical operations.

Management buy-out
A management buy-out (MBO) is a transaction in which a company's existing management
team acquires a significant portion or all of the company from the current owners. This often
involves securing financing from external sources such as private equity firms, banks, or
venture capitalists.

Key points about management buy-outs:

 Ownership Transition: The company's management team becomes the new owners.
 Motivations: Management teams pursue MBOs to gain greater control, align their
interests with the company's success, and potentially realize financial gains.
 Financing: MBOs typically require substantial external financing, which can be
structured through various means such as loans, equity investments, or mezzanine
financing.
 Company Performance: MBOs can lead to increased focus on performance and
efficiency, as management has a vested interest in the company's success.
 Risk and Reward: While MBOs offer the potential for significant rewards, they also
involve considerable financial risk for the management team.

Examples of management buy-outs include:

 Dell Inc.: In 2013, Michael Dell and private equity firm Silver Lake Partners bought
out the company, transitioning it from a publicly traded company to a privately held
one.
 Heinz: In 2013, Heinz's management, along with private equity firms Berkshire
Hathaway and 3G Capital, undertook a buy-out of the company.

Leveraged buy-out
A leveraged buy-out (LBO) is a financial transaction in which a company is acquired using a
significant amount of borrowed money, typically through loans or bonds, to meet the cost of
the acquisition. The assets of the company being acquired, as well as those of the acquiring
company, are often used as collateral for the loans. LBOs are primarily used to allow
companies to make large acquisitions without committing a lot of capital.

Key points about leveraged buy-outs:

 High Leverage: The acquisition is heavily financed through debt, often accounting
for 60-90% of the purchase price.
 Collateral: The acquired company's assets and cash flows are used as collateral for
the borrowed funds.
 Ownership and Control: LBOs often result in the company going private if it was
previously publicly traded.
 Focus on Efficiency: Post-acquisition, there is often a strong focus on improving
efficiency and profitability to meet debt obligations.
 Risk and Reward: While LBOs can offer high returns if the company performs well,
they also carry substantial risk due to the high debt levels.
Examples of leveraged buy-outs include:

 Heinz: In 2013, the acquisition of Heinz by Berkshire Hathaway and 3G Capital

involved significant leverage.
 Hilton Hotels: In 2007, The Blackstone Group acquired Hilton Hotels in a $26 billion
LBO, one of the largest hotel deals at the time.

Going private
"Going private" refers to the process where a publicly traded company is transformed into a
privately held entity. This is often achieved through a buy-out, where a group of investors,
which can include the company’s management, private equity firms, or other financial
sponsors, purchase all of the company’s outstanding shares.

Key points about going private:

 Delisting from Stock Exchange: The company's shares are no longer traded on
public stock exchanges.
 Ownership Consolidation: The ownership is consolidated among a smaller group of
investors.
 Reduced Regulatory Requirements: Private companies are subject to fewer
regulatory requirements and disclosures compared to public companies.
 Long-Term Focus: Freed from the pressure of quarterly earnings reports and short-
term market expectations, private companies can focus on long-term strategies.
 Financing: Going private often involves significant financing, which can be obtained
through leveraged buy-outs (LBOs).

Reasons for going private:

 Management Control: Allows current management more control over company

operations without shareholder interference.
 Cost Savings: Reduces the costs associated with being a public company, such as
regulatory compliance and public reporting.
 Strategic Flexibility: Provides the flexibility to make strategic decisions that might
not be immediately profitable without the scrutiny of public shareholders.
 Restructuring and Turnaround: Facilitates the ability to restructure and make
necessary changes without the scrutiny and short-term focus of public investors.

Examples of companies that have gone private:

 Dell Technologies: In 2013, Michael Dell, along with Silver Lake Partners, took Dell
private in a $24.4 billion buy-out.
 Panera Bread: In 2017, Panera Bread was acquired by JAB Holding Company and
went private in a deal valued at approximately $7.5 billion.