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Exploring Different Types of Mergers and Acquisitions
People often interchange the terms mergers and acquisitions, but each is distinct. Both terms represent a transaction ...
People often interchange the terms mergers and acquisitions, but each is distinct. Both terms represent a transaction that combines two companies, but they differ in the transition of shares and power. There are many types of mergers and acquisitions, each with its purpose. Learn more about each variant to understand the benefits to business owners and shareholders and find out how to streamline the processes.
9 Types of Mergers and Acquisitions
Generally, a merger is mutually beneficial and often involves companies of similar size. The shareholders of each company maintain ownership in the new resulting company.
On the other hand, an acquisition is a purchase of one company’s assets or outstanding shares by another company. The target company’s shareholders receive proceeds from the sale with no future ownership.
Each type of merger or acquisition provides benefits and consequences. Understanding the pros and cons can help business owners make fair arrangements for their beneficiaries and partners. At a minimum, there are nine basic M&A arrangements.
1. Horizontal Merger
One of the most common types of mergers is the horizontal merger. The two companies in a horizontal agreement operate in the same industry and offer similar services and products.
The primary benefit of a horizontal merger is the consolidation of operations and expenses. Joining the two companies gives the emerging company greater bargaining power and increases its competitive position. Ultimately, this type of merger provides greater economies of scale and lowers operating costs through shared production and distribution channels. The 2022 merger of Warner Media and Discovery Communications is a recent example of a horizontal merger.
2. Market Extension Merger
When discussing types of mergers and acquisitions, one cannot leave out the market extension merger. Some may argue this type of merger is a variation of the horizontal merger because it usually involves companies within one industry that share similar services and products. Still, while consolidation is part of it, the primary goal is geographic expansion.
Market extension mergers usually occur across borders, offering each company trade and operational benefits. The process often results in revenue and cost synergies — additional values.
A recent example is the 2022 merger between Wight Shipyard, a U.K.-based entity, and OCEA, a France-based entity. The all-share merger increased access and resources for the merged organization, allowing for rapid growth and profits.
3. Vertical Merger or Acquisition
Where a horizontal merger focuses on two companies operating at the same level within a production or value chain, a vertical merger or acquisition focuses on companies at different levels. Vertical transactions are almost always acquisitions.
These types of mergers and acquisitions are almost always about ensuring control over a company’s value chain. For example, a food retailer may seek to acquire one of its food producers to bring production in-house, lowering costs.
Reducing costs is the primary aim and benefit of vertical acquisitions. By lowering costs in the value or production chain, a company can pass the savings to consumers, boosting its competitive advantage. A company may also pass the savings onto shareholders by enhancing returns, building more faith in the operation.
4. Conglomerate Mergers and Acquisitions
Conglomerations own various brands, products, and services, producing diverse and eclectic portfolios. Their portfolios typically derive from a series of bolt-on acquisitions.
A conglomerate merger or acquisition occurs when two companies operating in different industries decide to unite. While there is value in a diverse portfolio, most experts agree that these types of mergers and acquisitions do not create a lot of value by themselves. The value stems from the management of the various assets.
Many larger corporations are conglomerates. For example, General Electric is a familiar electronics company. Initially founded by Thomas Edison, GE has several independent but interlinked arms operating in energy, real estate, media, finance, and healthcare. Proctor & Gamble and Nestle are two other preeminent conglomerates; most consumers will recognize the names.
5. Product Extension Merger
A product extension merger, also known as a congeneric or concentric acquisition, is about expanding product and service offerings. Rather than focusing on merging with a company in the same industry with similar offerings, an interested company targets a business with different products and services than its own.
The value of the product extension merger is found through revenue synergies. By acquiring or merging, a company creates opportunities for cross-promotions and sales. For instance, an ice cream manufacturer can improve market share in the industry by acquiring or merging with a wafer manufacturer.
For example, before Citigroup Inc., there was Citicorp — a banking giant — and Travelers Group — a financial service company. Both companies merged in 1998, creating Citigroup Inc., which offers traditional banking, insurance, and brokerage services.
6. Reverse Takeover
You cannot discuss types of mergers and acquisitions without addressing takeovers. A takeover is a form of acquisition that can be friendly or hostile. A hostile takeover is done without the knowledge of management and occurs when the acquirer approaches shareholders directly. A friendly takeover is a mutual agreement between the acquirer and the acquiree.
A reverse takeover can be friendly or hostile, though it is generally more advantageous to approach an acquiree outright. The process is a more cost-effective approach for small enterprises to acquire a public company listing. One example is the acquisition of US Airways by America West.
7. Resource-Acquiring Acquisitions
A resource-acquiring acquisition is one of the most popular types of acquisitions today. The process occurs when one company buys another to access its assets, including market access, personnel, and intellectual property.
One of the most common forms of resource-acquiring acquisitions is acqui-hiring. People or talent are among today's most valuable commodities and assets, especially in a tech-centric world. Unfortunately, as of 2023, software developer shortages remain a top challenge in the industry.
Acqui-hiring is most common in the technology sector. These types of mergers and acquisitions often occur among Big Tech companies that will do almost anything to secure top talent and their positions in the market. An excellent example is from 2010 when Facebook acquired Drop.io for the sole purpose of acquiring Sam Lessin, its CEO.
8. Consolidating Acquisitions
A consolidating acquisition is about eliminating direct competition. One company aims to acquire a company that offers similar products and services within its industry.
While this acquisition may sound similar to a horizontal merger, it differs because the acquirer is not looking for a partner. The sole purpose of a consolidating acquisition, unlike some other types of mergers and acquisitions, is to increase market share by eliminating a competitor.
Microsoft’s acquisition of Activision Blizzard in 2022 is an example of a consolidating acquisition. This type of acquisition can occur in various industries, from tech to healthcare.
9. Speculating Acquisition
Speculation is a financial term referring to the purchase of an asset with a perceived but not yet realized value. In a speculating acquisition, a company aims to acquire a smaller business for market access to its products and services. This type of acquisition is also popular in the tech industry, where new developments seem to occur daily.
A big tech firm may acquire a startup with promise in a growing field, augmented reality. By acquiring the company, the firm saves money and time on research and development, allowing it to corner a developing market.
Organizing Tech and Data From All Types of Mergers and Acquisitions
Regardless of the types of mergers and acquisitions, each M&A brings obstacles and needs for organizations. As companies combine, they must retire legacy systems and move toward more modern structures, including cloud applications and storage. The migration to new tools and integration of advanced mediums is challenging, especially when coupled with the specifics of mergers or acquisitions. To ensure a clean and efficient transition, contact Cloudficient to learn more about our migration solutions.
With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.