Mergers under Section 5 of the Competition Act, 2002 can be classified based on the nature of relationship between the merging enterprises in the value chain or the relevant product market. Based on this criteria, there are three primary types of mergers. These are – horizontal, vertical, and conglomerate. 

1. Horizontal Merger: This refers to any merger between enterprises operating in the same relevant market and producing or selling similar or substitutable products/services. The biggest concern with these types of mergers pertains to the potential price collusion, reduced output or diminished output. This is caused due to the reduced number of competitors in the market. 

2. Vertical Mergers: This involves a combination of two or more firms that operate at different levels of the production or distribution chain. E.g. a manufacturer merging with a supplier of inputs. The primary competition concerns are not the loss of direct competition but the potential for foreclosure where the merged entity may refuse to supply inputs to competitors or refuse to distribute competitor’s products. This would lead to a raise in the costs for competitors and limit their market access.

3. Conglomerate Mergers: This refers to mergers of firms that do not operate in the same relevant market. There is no vertical or horizontal overlap between the activities of these firms. These mergers usually do not directly reduce competition in either party’s markets but it may still raise concerns if they produce portfolio effects or facilitate entry into adjacent markets in ways that adversely affect competition.

4. Market Extension Merger: This happens when two companies producing the same or similar products/services merge, but they operate in different geographic markets. The merger lets them expand their market reach without changing their product line.

5. Product Extension Merger: This happens when two companies operate in the same market but sell different but related products. The merger allows them to complement each other’s product portfolios and offer a wider range to the same set of customers.

There is a single test for checking the validity of all kinds of mergers under Indian competition law. This test checks whether these mergers would cause an appreciable adverse effect on the competition (AAEC) within the relevant market. A merger that significantly reduces the number of players in a market can shift market power, enabling the merged entity to raise prices or reduce output, thereby eroding consumer surplus. Even if efficiencies like cost savings or economies of scale are claimed, competition authorities test whether the effects of this transaction are “appreciable,” i.e. significant enough to distort the competitive process and harm consumer welfare.