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Circular Mergers: Definition, Examples, and Considerations

Last updated 03/28/2024 by

Alessandra Nicole

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A circular merger involves the consolidation of companies operating within the same market but offering different products or services. This strategic move aims to broaden the range of offerings and potentially gain market share. While it offers benefits such as product line expansion and economies of scale, executing a circular merger requires careful consideration of potential risks, including inefficiencies and strategic misalignment.

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What is a circular merger?

A circular merger is a strategic business transaction that involves the consolidation of companies operating within the same market but offering distinct products or services. Unlike vertical mergers, where companies in different stages of the production process merge, or horizontal mergers, which involve direct competitors, circular mergers focus on expanding the range of offerings within a specific market segment.

Understanding circular mergers

In a circular merger, companies aim to leverage synergies by combining their resources, expertise, and market presence to enhance their competitive position. By diversifying their product portfolio, companies can cater to a broader customer base and potentially increase their market share. For example, a circular merger between a software company and a hardware manufacturer may enable the combined entity to offer integrated solutions to customers, enhancing overall value proposition.

How circular mergers work

In a circular merger, companies undergo a process of due diligence to assess the strategic fit, financial viability, and potential synergies of the proposed merger. This involves evaluating factors such as market dynamics, customer preferences, competitive landscape, and regulatory requirements.
Once the decision to proceed with the merger is made, companies negotiate terms and conditions, including the exchange ratio of their shares, governance structure, management team composition, and integration plan. Upon receiving regulatory approvals and shareholder consent, the merger is finalized, and the integration process begins.

Example of a circular merger

A notable example of a circular merger is the joint venture formed between McLeod Russel, one of the world’s largest tea plantation companies, and Eveready Industries India Ltd, a battery and flashlight manufacturer. Both companies belong to the Williamson Magor Group, controlled by the Khaitan family.
In 2017, McLeod Russel and Eveready formed a 50-50 joint venture to enhance Eveready’s retail packet tea business. Eveready identified that its tea brands were neglected due to the company’s focus on battery and flashlight products. On the other hand, McLeod Russel, primarily a plantation company, sought to enter the retail tea business.
The joint venture aimed to leverage Eveready’s marketing and distribution expertise with McLeod Russel’s tea plantation knowledge to develop the packet tea business. According to Eveready, the Indian packet tea market is estimated at Rs 10,000 crore, or $1.5 billion.
Here is a list of the benefits and drawbacks to consider.
  • Expansion of product lines
  • Economies of scale
  • Access to new distribution channels
  • Diversification of revenue streams
  • Potential for increased market share
  • Risk of inefficiencies
  • Integration challenges
  • Strategic misalignment
  • Regulatory hurdles
  • Potential cultural clashes

Frequently asked questions

What are the potential risks of circular mergers?

Circular mergers may carry the risk of inefficiencies if the acquiring company lacks expertise in the target market segment. Additionally, there’s a possibility of strategic misalignment between the merging entities.

How do circular mergers differ from other types of mergers?

Circular mergers involve companies operating within the same market but offering different products or services, aiming to broaden their range of offerings. In contrast, vertical mergers involve companies at different stages of the production process, while horizontal mergers occur between direct competitors.

What factors should companies consider before engaging in a circular merger?

Companies should conduct thorough due diligence to assess strategic fit, financial viability, potential synergies, market dynamics, regulatory requirements, and integration challenges before proceeding with a circular merger.

Key takeaways

  • A circular merger involves the consolidation of companies operating within the same market but offering different products or services.
  • Benefits of circular mergers include expansion of product lines, economies of scale, access to new distribution channels, and diversification of revenue streams.
  • Companies should carefully evaluate potential risks and conduct thorough due diligence before engaging in a circular merger.

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