Definitions, examples, advantages and disadvantages of different types of mergers: horizontal, vertical and conglomerate

Microeconomic decision‑makers – Firms

Objective: Define the three main types of mergers, give examples, and evaluate the advantages and disadvantages of each.

1. Horizontal Merger

A horizontal merger occurs when two firms that operate at the same stage of production in the same industry combine.

Example: The merger of British Airways and Iberia created the International Airlines Group, both being airlines offering passenger services.

Advantages

• Increased market share → greater pricing power.
• Economies of scale: lower average costs (\$AC = \frac{TC}{Q}\$).
• Elimination of duplicate functions (e.g., marketing, administration).
• Enhanced ability to invest in research and development.

Disadvantages

• Potential for reduced competition leading to higher prices for consumers.
• Regulatory scrutiny and possible anti‑trust action.
• Integration problems: culture clash, redundancies, and staff morale.
• Risk of over‑capacity if demand falls.

2. Vertical Merger

A vertical merger joins firms operating at different stages of the same production chain.

Example: The acquisition of Whole Foods Market by Amazon, linking an online retailer with a grocery retailer.

Advantages

• Improved coordination of supply chain → reduced transaction costs.
• Greater control over inputs and distribution, reducing uncertainty.
• Potential for cost savings through internalisation of previously external transactions.
• Ability to secure reliable supply of key inputs.

Disadvantages

• May foreclose market access for rival firms, attracting competition law concerns.
• Complex integration of different business processes.
• Potential for reduced flexibility if the merged firm becomes too dependent on its own internal supply.
• Higher capital requirements to acquire firms at different stages.

3. Conglomerate Merger

A conglomerate merger involves firms that operate in unrelated industries.

Example: GE’s acquisition of NBC Universal, combining an industrial conglomerate with a media company.

Advantages

• Diversification of risk across unrelated markets.
• Potential to use excess cash flows from one division to fund growth in another.
• Opportunities for cross‑selling and brand extension.
• Reduced vulnerability to industry‑specific downturns.

Disadvantages

• Management may lack expertise in the new industry, leading to inefficiency.
• Difficulty in achieving synergies because activities are unrelated.
• Possible dilution of core competencies and focus.
• Shareholder value may be eroded if the merger is perceived as a “diversification for its own sake”.

Comparison of Merger Types