Merging of two companies can be defined as "the legal act of combining two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock". There are a few types of mergers. Let's look at them one by one.
A horizontal merger refers to a unification or collaboration of two companies that are involved in the same business activity. This means that two companies manufacturing the same goods or commodity come together.
The purpose of these companies coming together could be that they can together attain a higher market share, reduce the price of the manufactured goods to increase its demand, and also to increase the product efficiency.
A vertical merger will indicate that two companies that have a buyer-seller relationship have come together. They could have shared a buyer-seller relationship before or could also have shared a potential buyer-seller relationship. Example: If a steel manufacturing company overtakes a car manufacturing company or vice versa.
The purpose of such a merger could be to increase the returns of scale, decrease the cost of production and to increase product efficiency.
A conglomeration merger indicates a merger of two companies which are not related. By 'not related' I mean that both the company's products are not related to each other in terms of consumers, market and demand. For example: When an automobile manufacturing company enters into a merger with a pharmaceutical company, it will be termed as a conglomeration merger.
The purpose of such a merger is to reduce risk, transfer skills and technology, and diversification.
Market Extension Merger
A market extension merger indicates a merger of two companies that manufacture the same or identical products but they sell it in completely different markets. For example: A local or domestic software developing company is taken over by a multinational software developing company.
A product-extension merger indicates a merger of companies that do not manufacture the same goods but they manufacture goods that fall in the same category. For example: If a company manufacturing laptops overtakes a company that manufactures 'portable hard disks' or 'flash drives', then this would be termed as a product-extension merger. Here the laptop and the portable hard disk are two different products but they both come under the category of computers.
A forward merger is a vertical integration of those firms or vendors which buy raw-material or semi-finished goods from a supplier. These are the firms that make the final goods or finished goods.
This could be done to increase the market share, and for product and price efficiency.
A backward extension merger is a vertical integration of the suppliers of raw-material or semi-finished goods. This form of a merger can be adapted to increase product and price efficiency.
A purchase merger is when a company purchases another company. Though this should then be called an acquisition, it is still known as a merger as the entire working of the overtaken company does not change and the purchase is either made in cash or in the form of a debt instrument. This form of a merger is used to derive tax benefits.
A consolidation merger is one where in both the companies are dissolved and a new entity is formed. This form of a merger is used when one wants to introduce a new product to attain a higher market share, to increase product efficiency and to attain tax benefits.
Out of the above nine types of mergers given, the first five types are more commonly used and known types. The type of merger chosen by the companies to merge is done on the basis of whatever is the most suitable to them in terms of making higher profit and expansion.