Merging businesses can provide a multitude of benefits to the firms involved and their customers. Cost synergies are generally the most easily and accurately quantifiable, and should be actively identified by companies looking to merge with and take over another business . Below is a simplified version of horizontal and vertical business mergers and the costs synergies they can provide businesses.
Vertical Merger
Through a vertical merger a reduction in the costs of production and an increase in efficiency should be achieved.
A vertical merger occurs when two or more companies along the supply chain for an industry join forces. The strategies for this can be a backward integration, where for example the retailer purchases the wholesaler or a forward integration where the manufacturer acquires the distributors to reduce costs and be closer to the customers.
When this occurs the acquiring company automatically removes costs by eliminating the margins previously charged. Costs can be further reduced through clearer communication lines, lower transport cost, better pricing on parts and can also give the acquiring company a useful insight into their rivals if they use the same supplier.
Horizontal Merger
Horizontal mergers are also a viable solution to reduce costs, with the most significant savings coming through economies of scale.
A horizontal merger occurs when two or more companies operating in the same industry merge. An example of this would be two accounting firms joining together.
When this occurs a larger company is formed which can generate a number of savings through economies of scale across a number of areas of the business. Areas where the size of the firm will generate the greatest savings are generally seen in rent, travel expenses, supplies, and research and development. A good analyst will be able to find particular nuances relevant to each industry that will be able to generate the greatest level of synergies through horizontal mergers.
Other Types of Mergers
Conglomerate, market extension and product extension mergers are also types of mergers business owners can consider. The main benefits of these types of mergers can be derived from diversifying risk or they may be an avenue to enter larger markets.
Find Out More
Quinn M&A’s expert team of business transaction advisors can assist you to with planning and executing a merger. Contact Quinn M&A today on +612 9223 9166 or submit an Express Enquiry to arrange a confidential no cost consultation with one of our Senior Advisors.
