Classification of Mergers

Horizontal merger - Two companies that are in direct competition and share similar product lines and markets (eg: Sirius/XM)

Vertical merger - A customer and company or a supplier and company. (eg: an ice cream maker merges with the dairy farm whom they previously purchased milk from; now, the milk is 'free')

Market-extension merger - Two companies that sell the same products in different marketsCATEGORIES OF MERGERS Mergers may be broadly classified in (i) Cogeneric and (ii) Conglomerate.

Cogeneric : within same industries and taking place at the same level of economic activity- exploration, production or manufacturing wholesale distribution or retail distribution to the ultimate consumer. Conglomerate : between unrelated business.

(i) Cogeneric merger are of two types Horizontal merger (b) Vertical merger (eg: an ice cream maker in the United States merges with an ice cream maker in Canada)

Product-extension merger - Two companies selling different but related products in the same market (eg: a cone supplier merging with an ice cream maker).

Conglomeration - Two companies that have no common business areas.

* Congeneric merger/concentric 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. Example: Prudential's acquisition of Bache & Company.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.