Conglomerate and Cogeneric Mergers
Definition and Characteristics
Types of Business Mergers
Conglomerate mergers and congeneric mergers are two types of mergers with different characteristics from horizontal and vertical mergers. Horizontal mergers involve two competitors merging. Vertical mergers involve a buyer and a seller merging. Both of these types of mergers involve companies that are somehow related combining their business operations. Congeneric mergers involve companies in related lines of business.
Conglomerate mergers do not.
Congeneric mergers are those where both companies involved in the merger are related by technology, markets, or production processes. The acquired firm in a congeneric merger is either an extension of a product line or a market related to the acquiring firm. A product extension merger happens when a new product line from an acquired firm is added to the existing product line of the acquiring firm. A market extension merger is when a new or closely-related market is added to the acquiring firm's existing markets through the acquired firm.
Conglomerate mergers are mergers of two business firms engaged in unrelated business activities. The two firms are not two competitors merging as in horizontal mergers. They are also not a buyer and seller merging as in vertical mergers. They have no actual connection. In theory, the firms in a conglomerate merger have no overlapping factors, but in practice there is as aspect that they see as important that has drawn them together.
They may see overlap in technologies, production, marketing, financial management, research and development or some other factor that makes them think they would be a good fit for each other.
In fact, in conglomerate mergers, it only really makes sense from a shareholder wealth perspective for two companies to merge if there is a synergistic effect.
Synergy is a concept you will often hear in business and, in particular, regarding mergers. Synergy can best be explained by saying it is the 2 + 2 = 5 effect. In other words, if two companies merge, the sum of the whole company should be greater than the sum of each part in order for the merger to make sense. If there isn't a synergistic effect between two merging companies, you have to wonder if the combination of the companies is a shareholder wealth maximizing activity.
Why would two completely unrelated firms want to merge anyway? Even though this reason is never stated by the merging firms, it is often about market power. Some firms think, "The bigger, the better." Economists who are "anti-conglomerate" think that acquisitions of smaller firms by big conglomerates cause less efficiency in the financial markets. Along with market power, another reason one large firm may want to acquire another firm is to diversify its operations. If a large firm has just one line of business, it is very vulnerable to the ups and downs of the larger financial markets and the economy. If it introduces one or more new businesses in different areas under its "umbrella," it diversifies its product line and becomes less vulnerable to the whims of the market.
Consideration: The Problem with Market Power
Firms that engage in horizontal mergers, as opposed to conglomerate firms, are more likely to merge to gain market power. Their mergers tend to consolidate industries. Take, for example, the banking industry. Banks that have merged since 1980 have moved horizontally to acquire other banks. In many cases, larger banks have acquired many smaller banks. The banking industry, since the Deregulation and Monetary Control Act of 1980, has become very consolidated. Regional banks and large national banks have essentially taken control of the banking industry.
During the Great Recession of 2008, we saw the damage the big investment banks did to the economy. Just as bad as that, we saw how banks shut down credit to small businesses in the U.S. during and after the recession.
This would not have been such a huge problem if the banking industry had not been so consolidated. They had the market power, however, to do this.