Types of Mergers
When companies merge, the direction of the merger determines which type it is. The three main types are horizontal, vertical, and diagonal.
Horizontal merger
A horizontal merger combines companies that operate at the same level of the value chain in the same industry, typically direct competitors.
Goal: Grow market share, eliminate competition, and achieve economies of scale.
Example: Two car manufacturers merging, or two retail banks combining.
Vertical merger
A vertical merger combines companies that operate at different levels of the same value chain, i.e. a supplier and a customer.
There are two directions:
- Forward integration: A company acquires a business that is closer to the end customer (e.g. a manufacturer acquires a retail chain)
- Backward integration: A company acquires a business that is closer to the raw material (e.g. a manufacturer acquires a parts supplier)
Goal: Secure the supply chain, reduce dependency on external partners, and cut costs by eliminating middlemen.
Example: A car manufacturer acquiring a steel supplier (backward), or a producer acquiring its own distribution network (forward).
Diagonal merger
A diagonal merger (also called a conglomerate merger) combines companies from completely unrelated industries with no direct supply-chain relationship.
Goal: Diversify the business, spread risk across different markets, and open new revenue streams.
Example: A manufacturing company acquiring a financial services firm, or a media company acquiring a logistics provider.
Comparison
| Type | Companies involved | Primary goal |
|---|---|---|
| Horizontal | Same industry, same level | Market share, scale |
| Vertical | Same industry, different supply level | Supply security, cost cut |
| Diagonal | Different industries | Diversification |