6. An Economist's Perspective

From the point of view of an economist, it also makes sense to look at the specific elements of a value chain in which the deal parties operate. In this context, mergers are often classified as follows:

  • Horizontal mergers
  • Vertical mergers
  • Conglomerate mergers.

 

Horizontal Merger

In a horizontal merger, the involved firms operate in the same industry and have similar activities. Horizontal mergers are a typical sign of consolidating industries, where competitors merge to reduce overcapacity and save costs. Examples of horizontal mergers are:

  • United and Continental, which merged into United Continental Holding via stock swap in October 2010.
  • Exxon and Mobile, which merged into ExxonMobile back in 1998

 

Vertical Merger

Vertical mergers are transactions among firms in the same industry, but typically not in the same segment of a value chain. Therefore, these are typically deals that involve a firm's suppliers or distributors. Acquisitions of companies in earlier segments of the value chain (e.g., supplies) are sometimes referred to as backward integrations, whereas acquisitions of companies in a later segment of the value chain (e.g., distributors) are called forward integrations.

With a vertical merger, the company gains better control over its value chain, which could facilitate the harmonization of its product components. Arguably, this was an important form of integration in the evolution of smartphones (and similar devices), where one of the core innovations was to "fully" integrate hardware and software. Examples of such acquisitions are:

  • Apple's acquisition of Siri in 2010
  • Google's acquisition of Motorola Mobile in 2011

 

Conglomerate Mergers

Finally, conglomerate mergers involve firms that operate in largely unrelated industries or (very) different geographic areas. Often, the purpose of such mergers is to diversify the business risk, which is why they are sometimes called diversifying acquisitions. Because the involved companies often require vastly different core competences, it is not easy to add value with such deals. A prominent example of such a transaction is Walt Disney's acquisition of American Broadcasting Company in 1995.