The Ultimate Guide to Market Extension Merger

In the world of business, sometimes a merger is a necessary evil to expand your market.

When you’re starting the business, your reach may still be rather limited – in which case, you can use the influence of another company to expand it.

Other mergers can be very useful as well, but if your purpose is to increase your reach, then you may want to go for a market extension merger. 

If you are interested in market extension mergers and what they can do for you, then this article prepared by our DealRoom team should be able to give you the basic information on that.

Think about two companies that both sell clothing and fashion accessories.

Company A sells clothes in the outskirts, whereas company B sells to people that are in the main town. By merging the two companies, all categories of people would be targeted with the resulting product line. 

The Purpose of a Market Extension Merger

A market extension merger has one purpose: to expand. Just like you may target a different market from the same country, a market extension merger may be used to target a similar market from a different country.

Or let’s say that a company has a reach in Switzerland, while the other targets France.

The merging of these two could increase their market reach worldwide, allowing them to sell to the same category of people from other geographic points. 

If two credit unions or banks from different regions merge, then this would be considered a market extension merger.

The newly merged company would have doubled its clients at this point, making it quite a significant competitor. Because of its growth, it could attract new clients.  

Reasons for a Market Extension Merger

There are a few reasons why a company might decide to go for a market extension merger, but overall, the main reason is to get access to a bigger market – and consequently, a bigger client base.

After all, the purpose of every company is to increase its reach enough to gain more profit.

A market extension merger becomes a good strategy when you feel like you can no longer reach the customers that you intend to. It is also something to look forward to when you feel like your reach is severely limited and you wish to expand your product to other markets. 

Let’s say that your company sells a product in the United States, but you feel like the people in Canada are also a good audience for you.

In that case, you may buy a company that sells the product in Canada and increase your reach.

A market extension merger is typically your go-to when you wish to expand state-wide or globally.

Multiple companies may merge in this regard, but once the merger is a success, the company recognition will become worldwide. 

Market Extension Merger Examples

One good example of a market extension merger was when RBC Centura acquired Eagle Bancshares.

The headquarters of Eagle Bancshares is in Atlanta, Georgia, and has a total of 283 employees. It has a significant number of 90,000 accounts and looks over US assets that are worth $1.1 billion.

One thing that made Eagle Bancshares an attractive merger prospect was the fact that it also had hold of the Tucker Federal bank – one of the biggest banks in Atlanta. When you needed to deposit market shares, this was the bank that you were supposed to go to.

When the RBC Centura acquired and merged with this bank, they received access to the market in North America. Plus, the Atlanta financial market was a leader in the banking world, which made it a great opportunity for RBC. 

Market Extension Merger: Advantages and Disadvantages

Market extension mergers have several advantages, as well as drawbacks. By placing all of them in balance, you should be able to determine whether or not this type of merger is a good option for you or not.

The Advantages of Market Extension Merger 

Due to their reach, market extension mergers are quite popular for people wishing to expand their business. With that in mind, here are the advantages that you may reap:

• You Get New Team Members

By expanding into another market, you may be getting new team members.

After all, when you purchase the company for a merger, even if it’s for the purpose of accessing a new market, you will also receive new employees that you know are qualified for the job.

This way, you’ll be able to gather new ideas to help improve the expansion process.

• Bigger Customer Base

This is perhaps an obvious reason, but the biggest advantage of a market extension merger is the fact that you’ll get a greater customer base.

Once the merger occurs, you can sell your product to a bigger audience. This will read to higher profits, which is what you are aiming for with this merger. 

• You Attract New Clients

When you go through a market extension merger, you get access to the old clients of both merging parties.

However, when this kind of merger happens, the company will inevitably grow – and with this growth, you will be attracting new clients. Before the two companies merge, both are likely relatively small and less trustworthy (in the eye of the customer).

However, with the merger, the true level of the company increases with the reputation – and in the end, it will bring the business owner more clients. 

• You Get a Possible Relocation

If you merge with another company from a different area, state, or country, you will have the possibility for relocation.

This will bring you better access to the customers of the new market. Plus, maybe the company that you are merging with has access to a variety of other technological resources.

So, aside from the wider market, you will also be able to use their technology. 

• You Can Improve Your Products

Each market had different expectations when it comes to a type of product, and by reaching a new audience, you may see what your current product is lacking.

Plus, since you will get various ideas from your new potential teammates, you will know what it takes to make your product an even better one. 

• You Reduce External Risks

When you expand your business through a market extension merger, you are reducing the external risks coming from your competition.

This is particularly a good thing if the company you are merging with has a reliable reputation. This way, not only will you be able to grow by using your own reputation, but you can also use the reputation of the other company.

In the eyes of the customer, this will give you even more reliability points and will make you more trustworthy.

The Disadvantages of Market Extension Merger

When you are going for a market extension merger there are also some disadvantages you should be aware of. In fact, these are more like considerations that you need to keep in mind.

They might not always be the case for every company going through a merger, but they are still a possibility.

This is why you need to be very careful and consider every risk before making your move. Overall, the (potential) disadvantages are as follows:

• You Have a Bigger Responsibility

This can either be a good thing or a bad thing, depending on who you are.

Some people are not suited for this kind of responsibility, and when more of it is placed on their shoulders, then it might prove to backfire.

This is why you need to be confident that you can handle this kind of responsibility. You must also do as much research as possible on the new tasks that you will have to undertake. 

• You Have Bigger Capital Requirements

With the merger, you will probably have a bigger production destined for a wider audience.

You will have a greater workforce as well and will likely have to make more investments in equipment.

In the end, when you are done with the merger, you will have to pay more in terms of capital requirements – something that may or may not bring forth a shortage of cash.

• You’re Incurring Potential Debt

While this is not always the case, when you merge with a company with the purpose of expanding your market, you may end up merging with their debt as well.

Most companies that merge with the “mother company” are often packed with debt, so you need to have a good plan in relieving that debt.

If the debt is too great or difficult to handle, then you will be dragging your own company down with the merger, so be very careful about this. 

The Bottom Line

A market extension merger can be a good option for every company owner looking to expand into another region.

However, make sure to do all your research and acquire a viable company with its respective market. Once you do, you are bound to reap the benefits.