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Understanding Market Extension and Product Extension Mergers

In the business world, especially in the financial markets of today, many companies seek to expand their reach beyond their usual range of operations and to diversify the range of products and services they offer. In order to do this, they typically have to merge with other companies. The two of the most basic and commonly used types of mergers are market extension mergers and product extension mergers.

What is a Market Extension Merger?

A market extension merger refers to the coming together of two companies that produce or sell the same type of product but to different markets. The main benefit of this type of merger is to give the companies that merge a larger market reach and client base as a result of its new capacity.

An example of this idea was the acquisition in 2002 of the American-based Eagle Bancshares Inc by the subsidiary of Royal Bank of Canada, RBC Centura Inc. This large acquisition saw the Canadian company gain access to Eagle Bancshare’s assets which were worth $1.1 billion, as well as almost 90,000 accounts.

By acquiring Eagle Bancshares inc, RBC Centura also acquired the Tucker Federal Bank, which Eagle owned. Tucker Federal Bank was, at that time, listed to be one of the top ten banks with the biggest deposit market share in the metropolitan Atlanta region. This large reach gave the Royal Bank of Canada the resources it needed to take root and build itself in the North American market.

Product Extension Merger

A product extension merger refers to a situation where two businesses who operate in the same market and offer products or services which are not the same but are often co-consumed decide to come together. The benefit of this type of merger is that the companies are able to create a meta product from their individual products and access a larger market. Pooling resources ensures that their cost of operations is reduced and profits are increased.

Example of Product Extension Merger

A historic example of a product extension merger was the acquisition of Pizza Hut by Pepsi Co in 1977. Pepsi understood that lots of people went to Pizza Huts, and that by merging with them, Pepsi would be able to reach a much wider market. The beloved pizza chain became a division of the soft drink maker which meant that everyone who bough a pie from Pizza Hut would only be able to purchase drinks in the Pepsi Co line. The merger took place in 1977 and within the year, sales nearly exceeded $436 million and Pizza Hut opened a new headquarters office in Wichita valued at  $10 million.

How do Market Extension Mergers and Product Extension Mergers Differ?

While market extension and product extension mergers may seem similar, they are not the same. The key difference is in the fact that market extension mergers usually involves two companies that produce the same product or service, while with product extension mergers, the two companies that come together do not produce the same product or service.

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