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Definition: Circular Merger
When two companies, which produce different products, but share certain similar functionalities like distribution channels, marketing, research facilities, merge together to achieve economies , then the process is called a circular merger.
A merger takes place when two companies combine into a single company, where one company loses its prior (to the merger) existence in the business world and the other one survives. After the merger, the survivor company acquires all the assets and the liabilities of the acquired company with the consent of the senior management of both the companies. Circular merger is one of the three types of mergers (the other two being horizontal and vertical).
In the case of circular mergers, companies with different product mix, but similar distribution channels or target customers or research facilities or markets consolidate into one single company. Circular merger can happen due to many reasons:
a. The companies seek to generate economies of scale by sharing their common resources.
b. The acquiring company can also realize diversification (e.g. : by entering into a new industry) through a circular merger.
c. The acquiring company can have their costs reduced and enlarge their markets, which would thus increase their profits.
A circular merger can prove to be risky when if the acquiring company does not have specific expertise within the targeted customer segment. And this can result in inefficiency, instead of the generation of economies, which is one of the major goals of the merger.
Example: In 1996, Hindustan Lever Ltd (HLL) and Brooke Bond Lipton India Ltd (BBLIL) merged together to come out as one of the largest consumer goods of the country. The companies had a significant overlap in the distribution channels (for personal products), specialty chemicals and exports businesses and even in the technology base. The merger was carried out to achieve economies of scale both in domestic and international markets and gain capital for future growth. This is a perfect example of a circular merger.