A merger joins two firms: at the same stage (horizontal), different stages (vertical), or in unrelated industries (conglomerate).
A merger is when two firms join to form one. Firms merge to grow faster, cut costs, gain market share or reduce risk.
A horizontal merger joins firms at the same stage of production in the same industry, such as two airlines. It can create economies of scale and remove a rival, but may reduce choice and raise prices for consumers.
A vertical merger joins firms at different stages of the same industry. Backward vertical means buying a supplier, such as a car maker buying a battery maker. Forward vertical means buying a customer or outlet, such as a brewer buying bars. It secures supplies or outlets, but the firm may become less efficient without competition.
A conglomerate merger joins firms in unrelated industries. It spreads risk across different markets. But managers may lack knowledge of the new business.
- Horizontal merger
- Same stage, same industry; e.g. two airlines.
- Vertical merger
- Different stages; backward (supplier) or forward (customer).
- Conglomerate merger
- Unrelated industries; spreads risk.
Worked example: Classifying mergers
Decide which type each merger is.
- A ride-hailing app buys a rival ride-hailing app: horizontal. In 2018 Grab bought Uber's Southeast Asian business.
- A chocolate maker buys a cocoa farm: backward vertical.
- A clothing maker buys a chain of clothes shops: forward vertical.
- A property developer buys a food delivery firm: conglomerate.
Watch out for this
A vertical merger is when a firm buys a rival in the same business.
That is horizontal. A vertical merger joins firms at different stages of production, such as a supplier and a manufacturer.
Check your understanding
A supermarket chain buys a dairy farm that supplies its milk. What type of merger is this?
- Backward vertical
- Horizontal
- Conglomerate