Mergers and acquisitions are defined as the process of combining two different companies to form a new company or new business entity. Mergers and acquisitions are abbreviated as M&A. M&A is one of the most essential components of corporate strategy and corporate finance and usually done by the companies to expand their operations to improve their profitability in the business.

Horizontal Mergers - Horizontal Integration, Horizontal Monopoly, Horizontal

Expansion

Horizontal mergers are those mergers where the companies manufacturing similar kinds of

commodities or running similar type of businesses merge with each other. The principal

objective behind this type of mergers is to achieve economies of scale in the production

procedure through carrying off duplication of installations, services and functions,

widening the line of products, decrease in working capital and fixed assets investment,

getting rid of competition, minimizing the advertising expenses, enhancing the market

capability and to get more dominance on the market. the horizontal mergers do not have

the capacity to ensure the market about the product and steady or uninterrupted raw

material supply. Horizontal mergers can sometimes result in monopoly and absorption of

economic power in the hands of a small number of commercial entities.

According to strategic management and microeconomics, the expression horizontal merger delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial enterprise for marketing a form of commodity or service in a large number of markets. In the context of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of production or manufacturing. A horizontal merger is when two 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. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.

Large horizontal mergers are often perceived as anticompetitive. If one company holding twenty percent of the market share combines with another company also holding twenty percent of the market share, their combined share holding will then increase to forty

percent. This large horizontal merger has now given the new company an unfair market advantage over its competitors.

All companies are subject to Federal laws that prohibit certain actions from taking place during a horizontal merger. When a horizontal merger takes place, the loss of a competitor in the market creates benefits for the companies that merged, while at the same time serves to drive prices up for the consumer. Federal laws protect the consumer by prohibiting companies from creating a monopoly.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally,

a monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that

condition where a company is involved in taking over or acquiring another company in

similar form of trade. In this way, a competitor is done away with and a wider market and

higher economies of scale are accomplished.

In the process of horizontal merger, the downstream purchasers and upstream suppliers

are also controlled and as a result of this, production expenses can be decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal

expansion. This refers to the expansion or growth of a company in a sector that is

presently functioning. The aim behind a horizontal expansion is to grow its market share

for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

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

India and Brook Bond

The merger of Bank of Mathura with ICICI (Industrial Credit and Investment

Corporation of India) Bank

The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power

Supply Company

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

Damodar Cement

Advantages of Horizontal Merger:

Horizontal merger provides the following advantages to the companies which are

merged:

1) Economies of scope

The notion of economies of scope resembles that of economies of scale. Economies of

scale principally denote effectiveness related to alterations in the supply side, for

example, growing or reducing production scale of an individual form of commodity. On

the other hand, economies of scope denote effectiveness principally related to alterations

in the demand side, for example growing or reducing the range of marketing and supply

of various forms of products. Economies of scope are one of the principal causes for

marketing plans like product lining, product bundling, as well as family branding.

2) Economies of scale

Economies of scale refer to the cost benefits received by a company as the result of a

horizontal merger. The merged company is able to have bigger production volume in

comparison to the companies operating separately. Therefore, the merged company can

derive the benefits of economies of scale. The maximum use of plant facilities can be

done by the merged company, which will lead to a decrease in the average expenses of

the production.

The important benefits of economies of scale are the following:

 

Synergy

Growth or expansion

Risk diversification

Diminution in tax liability

Greater market capability and lesser competition

Financial synergy (Improved creditworthiness, enhancement of borrowing power,

decrease in the cost of capital, growth of value per share and price earning ratio, capital

raising, smaller flotation expenses)

Motivation for the managers

For attaining economies of scale, there are two methods and they are the following:

 

Increased fixed cost and static marginal cost

No or small fixed cost and decreasing marginal cost

One example of economies of scale is that if a company increases its production

twofold, then the entire expense of inputs goes up less than twofold.

3) Dominant existence in a particular market

Vertical mergers:

Vertical mergers are company mergers that involve the union of a customer with a

vendor. Generally, the two companies involved in the merger will produce different but

complimentary products. The vertical merger may take place as a means of combining

assets to capture a sector of the market that neither company could manage on their own.

Vertical mergers refer to a situation where a product manufacturer merges with the

supplier of inputs or raw materials. In can also be a merger between a product

manufacturer and the product's distributor.

Vertical mergers may violate the competitive spirit of markets. It can be used to block

competitors from accessing the raw material source or the distribution channel. Hence, it

is also known as "vertical foreclosure". It may create a sort of bottleneck problem.

As per research, vertical integration can affect the pricing incentive of a downstream producer. It may also affect a competitors incentive for selecting input suppliers. Research studies single out several factors, which point to the fact that vertical integration facilitates collusion. Vertical mergers may promote collusion through an outlets effect. A corollary of vertical integration is that integrated business structures are able to perform better in crisis phases. Vertical mergers are subject to the provisions of the Clayton Act (15 U.S.C.A. § 12 et seq.) governing transactions that come within the ambit of antitrust acts. Vertical integration by merger does not reduce the total number of economic entities operating at one level of the market, but it may change patterns of industry behavior.

Suppliers may lose a market for their goods, retail outlets may be deprived of supplies, and competitors may find that both supplies and outlets are blocked. Vertical mergers may also be anticompetitive because their entrenched market power may discourage new businesses from entering the market.

In most cases, the vertical merger is a union that takes place voluntarily. Both parties determine that joining forces will strengthen the current position of the two businesses, and also lay the foundation for expanding into other areas as well. For example, a company that produces bearings for factory machinery may choose to merge with a company that manufactures gears for the same type of machinery. Together, they continue to provide products to their existing clientele. At the same time, the newly merged entity will create product offerings that will expand the usage of current clients and also allow the new company to capture additional customers.

The purpose of a vertical merger is to build on the strengths of the two companies and allow for future growth. Along with exploring new ways to use existing product lines to create new products for a wider market, there is also the consideration of the assets in the possession of the merging companies. Often, such assets as property, buildings, inventories and cash assets can be reorganized to better position the newly combined company.

A vertical merger usually requires more than a simple agreement to join forces. Mergers of this type will involve careful planning on the part of both companies. Investors for both entities will be involved in the process, as well as both management teams. Generally, the companies will also want to prepare their respective client bases for the vertical merger by providing them with information about what is anticipated to change and what will remain the same. The idea is to assure existing customers that the products and services they rely upon will still be available, the level of service will remain high, and that there will be benefits to the merger that will make life easier for each of the customers.

There are multiple reasons, which promote the vertical integration by firms. Some of them are discussed below:

The prime reason being the reduction of uncertainty regarding the availability of

quality inputs as also the uncertainty regarding the demand for its products.

Firms may also enter vertical mergers to avail the plus points of economies of

integration.

Vertical merger may make the firms cost-efficient by streamlining its distribution

and production costs. It is also meant for the reduction of transactions costs like

marketing expenses and sales taxes. It ensures that a firm's resources are used optimally.

A vertical merger would consist of a company merging with either one of its bigger

customers or one of its bigger suppliers. Companies do verticle mergers so they can reduce

the costs along the supply chain and therefore offer the end product to end users more

efficiently. This would be like Intel (the chip maker) merging with Dell (the computer

maker).

A horizontal merger would consist of two companies in the same business as competitors

merging together to gain market share. This would be like Dell merging with IBM or some

other computer maker. Vertical mergers involve a manufacturer forming a partnership with

a distributor. This makes it hard for competing companies to compete with the newly

merged company because of the advantages that the merger brings. These benefits occur

because the distributor no longer has to pay the supplier for material any longer because the

supplier and distributor are now one entity. Formally, the distributor would have had to pay

the supplier enough money to cover the cost of the material plus whatever the supplier

charged in order to make a profit on the transaction. With the two companies merged, the

distributor is free to get the material at base cost and does not have to pay any extra to

another company that is looking to make a profit. This allows for the merged company to

have less money tied up in production of a good.

Example of Vertical Merger

Vertical mergers can best be understood from examining real world deals. One such merger

occurred between Time Warner Incorporated, a major cable operation, and the Turner

Corporation, which produces CNN, TBS, and other programming. In this merger, the

Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow

Time Warner to monopolize much of the programming on television. Ultimately, the FTC

voted to allow the merger but stipulated that the merger could not act in the interests of anti-

competitiveness to the point at which the public good was harmed.

Conglomerate mergers:

It generally involve the union of two companies that have no type of common interest, are not in competition with any of the same competitors, and do not make use of the same suppliers or vendors. Essentially, the conglomerate merger usually brings together two companies with no connections whatsoever under one corporate umbrella. This type of arrangement can be very desirable when the investors for the newly created conglomerate wish to create a strong presence in two different markets. A conglomerate merger is a type of merger whereby the two companies that merge with each other are involved in different sorts of businesses. The importance of the conglomerate mergers lies in the fact that they help the merging companies to be better than before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers – the pure conglomerate merger

and the mixed conglomerate merger. The pure conglomerate merger is one where the

merging companies are doing businesses that are totally unrelated to each other.

The mixed conglomerate mergers are ones where the companies that are merging with

each other are doing so with the main purpose of gaining access to a wider market and

client base or for expanding the range of products and services that are being provided by

them. There are also some other subdivisions of conglomerate mergers like the financial

conglomerates, the concentric companies, and the managerial conglomerates.

Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger. Among the more common reasons are adding to the share of the market that is owned by the company and indulging in cross selling. The companies also look to add to their overall synergy and productivity by adopting the method of conglomerate mergers. merger can take place for a number of reasons. Often, the merger is undertaken in order to allow two unrelated businesses to draw on the combined resources to strengthen the position of each company in their respective industries. Mergers of this type may come from a desire to protect both entities from economic downturns that could temporarily impact the bottom line of one of the entities. In the case of a mixed conglomerate merger, the purpose may be to generate an increased presence within a given industry by covering

more aspects of that industry. Even something as simple as a common approach to business in general may be grounds for the creation of a conglomerate merger.

The conglomerate merger has been the means of many companies surviving shifts in consumer tastes, technological advances that rendered some goods and services obsolete, and political upheavals. Many business analysts find that a conglomerate merger, when handled properly, will result in the newly combined multi-industry corporation being significantly stronger than the individual companies could ever hope to become.

Benefits of Conglomerate Mergers

There are several advantages of the conglomerate mergers. One of the major benefits is

that conglomerate mergers assist the companies to diversify. As a result of conglomerate

mergers the merging companies can also bring down the levels of their exposure to risks.

Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seen that

companies are going for conglomerate mergers in order to increase their sizes. However,

this also, at times, has adverse effects on the functioning of the new company. It has

normally been observed that these companies are not able to perform like they used to

before the merger took place. This was evident in the 1960s when the conglomerate

mergers were the general trend. The term conglomerate mergers also implies that the two

companies that are merging do not even have the same customer base as they are in

totally different businesses. It has normally been seen that a lot of companies that go for

conglomerate mergers are able to manage a wide variety of activities in a particular

market. For example, these companies can carry out research activities and applied

engineering processes. They are also able to add to their production as well as strengthen

the marketing area that ensures better profitability.

It has been seen from case studies that conglomerate mergers do not affect the structures

of the industries. However, there might be significant impact if the acquiring company

happens to be a leading company of its market that is not concentrated and has a large

number of entry barriers.

CONGENERIC MERGERS:

Companies that are in the same industry but do not have a competitive supplier or

customer relationship may choose to pursue a congeneric merger, which could allow the

resultant company to be able to provide more products or services to its customers.

Congeneric mergers occur where two merging firms are in the same general industry, but

they have no mutual buyer/customer or supplier relationship, such as a merger between a

bank and a leasing company.

One widely cited example of this type of deal is the 1981 merger between Prudential

Financial (NYSE:PRU) and stock brokerage company Bache & Co. Although both

companies were involved in the financial services sector, prior to the deal, Prudential was

focused primarily on insurance while Bache dealt with the stock market. An example of a

congeneric merger is Citigroup's acquisition of Travelers Insurance. While both were

in the financial services industry, they had different product lines.

ETHICAL ISSUES IN MERGERS AND ACQUISITIONS:

Mergers and acquisitions involve a wide array of ethical questions, someof which relate to the degree of "fit" between the value systems of themerging firms. A mismatch can sometimes lead to serious problems, suchas when one firm invests heavily in employees and the other focusesmainly on shareholders or customer.

A secondary category of ethical issues, she notes, involves questions

arising from the actual M&A; transaction. Some really vexing issues

surface in the course of these deals. Management must decide, for

example, when to disclose plans for the merger, what restrictions to place

on insider use of information, what counts as fair and proper accounting

and taxation, and how to treat employees who may lose their jobs.

In M&A’s that cross borders, these issues can be particularly difficult

because of cultural and legal differences. For example, the legal definition

of 'redundant employees' varies widely as do requirements for severance

arrangements. In the face of such differences, managers of the merging

companies have to wrestle with what is fair to the different sets of

employees and what will help build a cohesive organization with a single

set of ethical standards going forward.

Host governments may present additional challenges and opportunities in

the international context. Managers of firms that enter foreign countries

through their M&A strategies need to be aware of these issues.

Governments tend to protect their national interests when dealing with

foreign-owned firms. For example, in the United States an airline cannot

have more than 25% foreign ownership. Governments may have currency

laws that prevent a foreign-owned firm from taking money out of the

country. Labor laws may be different from those in a firm’s domestic

market. Such differences may be rooted in culture and tradition that may

prove to be difficult to recognize and/or understand.

SCOPE AND OBJECTIVES:

Most discussions of business ethics focus on the interaction between

organizations and the external stakeholders. On the other hand, internal

organizational ethics has received relatively less attention. Managers are

confronted with some of the most complex ethical dilemmas in their daily

human resource –related responsibilies. Such internal quandaries can be

especially problematic during mergers and acquisitions.

One of the primary objectives of this paper would be to address

questionable management decisions and tactics from ethical perspective.

The paper will also cover the process of the transactions involved in M&A

as these transactions offer many possibilities to show ethical as well as

questionable behaviour on the part of all the parties involved.

Methodolgy:

We will use a case based approach to analyze the effects of mergers and acquisitions and various ethical issues arising out of it.

We will apply ethical theories (teleological, deontological, utilitarian,

etc) to weigh the various options available to the management

during Mergers and Acquisitions