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What Is A Market Extension Merger
A market extension merger, as the name implies, is a type of merger where the merging companies intend to expand their overall market.
Generally, companies that embark on market extension mergers are companies having similar products offered in different markets.
By merging, the merged entity will have additional products to offer its clients and a larger market to sell to.
For example, a company can sell goods in North America while another company offers a similar product in Europe.
By merging, the combined entity will now be able to expand its market to both North America and Europe.
In mergers and acquisitions, a company can acquire another in different ways.
Let’s look at the main types of mergers and acquisitions.
Types of Mergers And Acquisitions
In mergers and acquisitions, there are different ways companies can acquire one another.
There are a few types of mergers and acquisitions: mergers, acquisitions, consolidations, tender offers, acquisition of assets, and management acquisition.
A merger is when two combines combine and form a new business entity.
An acquisition is when an acquiring company buys another company and keeps the target company’s name and structure.
A consolidation is when a new company is created, focusing on its core business and abandoning the previous corporate structure.
A tender offer is when a company offers to purchase all of the outstanding stock of another company at a specific price.
Acquisition of assets is when one company buys the assets of the other company without acquiring the legal entity owning the assets.
A management acquisition, or management buyout, is when a company’s managers purchase a controlling stake in the business they operate to take it private in most cases.
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Main Merger Structures
A market extension merger is one way that a merger can be structured, among other methods such as a horizontal merger, vertical merger, product-extension merger, and conglomerate merger.
A horizontal merger is when two competing entities merge.
A vertical merger is when companies in the same supply chain merge.
A product extension merger is when two companies selling different products merge.
A conglomerate merger is when unrelated businesses merge.
And a market extension merger is when companies selling similar products and services but in different markets merge.
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Why Market Extension Mergers
There are many types of mergers out there but why do companies execute market extension mergers?
Fundamentally, companies looking to merge are looking to grow their business.
A market extension merger is defined as when two companies offering similar products and services but in separate markets merge.
A merger is a good method for a company to immediately tap into the other company’s resources, know-how, and distribution channels.
Also, since the companies are already well-established in their respective markets and are about the same size, they can quickly double their revenues, and client-base, and take advantage of economies of scale.
A market extension merger is much easier than having to penetrate a new market, establish yourself in the field, develop a market share, and compete with an established local businesses.
Advantages of Market Extension Merger
The main benefit of a market extension merger is that two companies with similar products can tap into a larger market and reach more clients to distribute their products and services.
In addition, since the two merging entities offer similar products and services, they may take advantage of additional resources, capacity, and distribution channels.
Another key benefit is that the combined entity can benefit from one another’s know-how and process to achieve synergistic outcomes.
Ultimately, the merging companies’ main benefit is expanding their market share.
For instance, let’s say a company offers its products and services in North America while another company targets Europe.
The merging entities will be able to increase their client base, expand their target market, and share their resources, know-how, and capacity.
Disadvantages of Market Extension Merger
Although market extension mergers can result in many benefits to the merging companies, there are also drawbacks to consider.
One important drawback of a market extension merger is that the merged entity is unable to capitalize on its combined resources and capacity.
Also, the two companies may not be able to culturally mesh and still operate as competing entities or maintain a separate business operations.
In addition, the two companies combined may need to produce more to satisfy the additional customer needs and thus run into liquidity issues.
It’s important for the companies to properly forecast supply and demand along with their capital requirements to ensure they can satisfy their business needs.
A market extension merger can also lead the resulting company to be more in debt and require great cash flow from operations to satisfy its creditors.
As a result, the merged entity may not be able to access the credit facilities it believed it could access before the merger.
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Market Extension Merger vs Product Extension Merger
Let’s look at the main difference between a market extension merger and a product extension merger.
In the context of a market extension merger, the primary objective of the merging companies is to expand their “market”.
The merging companies typically offer similar products and services in different markets.
For example, an automobile manufacturer acquires another automobile manufacturer in another country.
They both have similar products, but they target different markets.
On the other hand, a product extension merger is a type of merger where the merging companies are looking to expand their product lines.
Generally, the merging companies do not produce similar goods and services.
By merging, the companies are looking to add additional products to their product list.
Market Extension Merger Examples
Example 1
One example of a market extension merger that is often cited is that of Royal Bank of Canada (RBC), a Canadian bank, looking to expand its banking business to the United States.
RBC’s subsidiary, RBC Centura, acquired the American company Eagle Bancshares Inc. allowing it to expand its banking business to 90,000 new accounts and manage over $1.1 billion in assets.
In addition, since Eagle Bancshares Inc owned Tucker Federal Bank, RBC Centura also acquired one of the top ten banks in the Atlanta metropolitan region.
Example 2
A hypothetical example of a market extension merger could be the merger of Amazon and Alibaba.
Both Amazon and Alibaba are highly similar e-commerce businesses.
However, they serve very different markets.
The merger of Amazon and Alibaba will result in the combined entity becoming a global e-commerce business providing services to both North America and Asia.
Takeaways
So there you have it folks!
What is a market extension merger?
In a nutshell, a “market extension merger” is a type of merger where the two companies merging are similar, have similar products and services, and similar clients but cater to different markets.
For example, a Canadian bank merging with an American bank is a market extension merger as both merging companies are banks, they have similar clients, and offer similar services, but they are geographically in different markets.
The purpose of a market extension merger is to quickly expand the market for your products and services and take advantage of the merging entities’ local presence, clientele, and resources.
Now that you know what is a market extension merger and how it works, good luck with your research!
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