The 4 Types of Mergers and Acquisitions

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Eric Allison Serial Entrepreneur

Thursday, February 13, 2020

Companies join together for a variety of reasons; they may opt to join forces with the intention to optimize their operations, share their resources, or accelerate their growth. If your company is facing a merger or acquisition, it’s crucial to have a clear understanding of it first.

Article 4 Minutes

What is a merger?

A merger is when two or more companies with equal footing decide to unite for each other’s benefit. Management can be divided equally or end up in the hands of a single entity—it all depends on the terms and conditions that were agreed upon by both parties. 

What is an acquisition?

An acquisition, however, is when a company takes complete control over another; a company buys all the assets or purchases all the stocks of another business.

Both terms may have their own clear definition, but they are often referred to together. The difference lies in how the transfer of control occurs. To simplify things, mergers can be referred to as partnerships while acquisitions are more of takeovers.

The 4 types of mergers and acquisitions

To ensure a smooth transition for your business, here is a quick guide to help you learn more about the different types of mergers and acquisitions (M&A).

1. Horizontal

This type of M&A occurs when a company works with or purchases another business that offers the same kind of products. For example, a horizontal merger is when a company that sells laptops decides to join with a company that also produces laptops.

The main benefit of this kind of merger is that it takes the competition out of the picture. By combining the target market of two or more rival companies, they’re able to widen their reach and increase their overall revenue. They’re also able to scale their business seamlessly by increasing production volume and reducing overhead costs.

2. Vertical

A vertical merger is when two businesses that are working at different stages of the supply chain decide to partner up.  A typical example would be a clothing retailer coming together with a textile supplier or a printing service. This cuts time and resources spent because fashion outlets won't have to hop from one service to another to mass-produce their clothes.

By operating in different stages of production, businesses that undertake this kind of M&A can increase the efficiency of their operations and easily address logistical concerns. Compared to horizontal mergers that enable companies to share their market with their partners, vertical mergers are done with the purpose of restricting competition.

Since measures are taken to the secure goods and services of a company, rival businesses won’t be able to acquire the aid of your partner or sister companies. This lets vertically-merged companies experience little to no disruption in supply while significantly increasing their market share and overall revenue.

3. Concentric

Concentric mergers happen among companies that serve the same customers or in the same industry. Unlike the vertical kind that offers the same products or the horizontal that combines companies in different supply chain stages, concentric merges occur with businesses that offer complementary products and services.

For example, a home appliance company that’s known for manufacturing microwaves can merge with or acquire another that produces refrigerators. After both companies combine their operations, they can improve and develop new products. Since they’re able to widen their product catalog, they can increase profit and pave the way for more business opportunities.

4. Conglomerate

Conglomerate mergers and acquisitions occur when two companies, regardless of the production stage or industry they’re in, decide to join as one. Since both parties are able to combine and extend their products and services, the risk of loss is reduced, market share is boosted, and opportunities for conversions are increased.

One famous example would be how Amazon acquired Whole Foods for $13.4 billion back in 2017. By extending its product offerings, Amazon was able to obtain a stronger presence in both the food and online retail industry. This kind of merger was common back in the ‘60s and ‘70s but is rarely seen nowadays.

Since it offers the least amount of benefits, most companies would opt for other forms of M&A. At the same time, it’s also prone to mismanagement since the businesses involved may not have enough experience in the industry of their partner.

Final takeaways

Mergers and acquisitions actually happen very often, but not all partnerships are able to enjoy success. These transactions involve plenty of resources, so legal concerns can arise if it’s not done with care.

Intellectual property issues and differences in company culture can also come into play and define how successful your partnership will turn out to be. Gathering all the necessary information about mergers and acquisitions beforehand will ensure that your company’s transition is free from any complications.

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Eric Allison

Serial Entrepreneur

Eric Allison is a serial entrepreneur with a high degree of experience in mergers and acquisitions. After putting up several of his own successful staffing firms and eventually brokering their exit he began his career in M&A. Eric has an in-depth understanding of both the buy-side and sell-side of mergers and acquisitions, having had firsthand experience on both ends of the deal.

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