Diversification is as important for business growth as it is in investment strategy. Companies with ambitions to dominate their sectors will seek to maximize profits by diversifying the range of products and services they offer. One of the quickest ways of expanding their reach beyond their usual scope of operations is for companies to merge with other companies. In order to shine a light on exactly how this is done, it is first necessary to understand the difference between market extension mergers and product extension mergers.
Market Extension Mergers Explained
A market extension merger is the name given to a process whereby two companies that produce or sell the same type of products come together to form a single entity. This is typically done to ensure the new company has a larger market reach and client base.
Market Extension Merger Example
A high-profile example of a market extension merger can be taken from the 2002 acquisition of the U.S. banking firm Eagle Bancshares Inc. by RBC Centura Inc., a subsidiary of Royal Bank of Canada. This merger gave the Canadian company access to Eagle Bancshares’ almost 90,000 U.S. client accounts, as well as to $1.1 billion worth of assets.
When it assumed control of Eagle Bancshares Inc., RBC Centura also came into possession of the Eagle-owned Tucker Federal Bank. At the time, Tucker Federal Bank was listed as among the banks with the biggest market share in deposits in the Atlanta area. These new acquisitions provided the Royal Bank of Canada with the resources it required to gain a foothold in the U.S. market.
Product Extension Mergers Explained
A product extension merger is when two companies operating in the same market which offer products or services which are different decide to join forces. In many cases, the products offered by these companies are often co-consumed. A product extension merger will often happen in aid of the creation of a meta-product that will allow the new company to outcompete its industry rivals. A central motive behind such mergers is the drive to slash operation costs to boost profits.
Product Extension Merger Example
A prominent example of a product extension merger can be seen in the 1977 acquisition of Pizza Hut by PepsiCo. Pepsi had identified that it desperately needed more visibility to increase the sales of its soda drink. The merger had advantages for both parties. PepsiCo increased its sales overnight by securing the exclusive rights to sell its drink Pizza Hut’s restaurants, and Pizza Hut was able to stock its restaurants with a drink that could be purchased in bulk on very favorable terms. Within a year of the merger, sales had risen above $436 million, and Pizza Hut was able to open a new headquarters building in Wichita worth $10 million with the profits.
Are Market Extension Mergers and Product Extension Mergers the Same?
Although product extension and market extension mergers are similar in many ways, there are some key differences between them. Central to these differences is that market extension mergers usually take place between two companies which provide the same product or service. In contrast, product extension.
mergers take place between two companies producing different products that are typically consumed together in order to improve their offering at the same time as cutting down on operating costs.
There are many more different types of mergers, if you’d like to learn more about the different types or have your questions answered about the above article, click here.