Management & Strategy
Dec 19, 2024
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This guide is designed to explain several different types of mergers and acquisitions and how they work. First, we explain the difference between mergers and acquisitions. Then, we explain several different types of mergers and acquisitions, looking at the strategic choices that lead to making M&A deals of these types. Here are some key takeaways about the types of mergers & acquisitions:
The terms “merger” and “acquisition” refer to different things but are sometimes used interchangeably.
A merger is when a business decides to combine with another business with the intention to operate as a single legal entity. Essentially a merger is a combination of two businesses. Generally, the two companies entering into a merger are equal in size. Often the objective of a merger is for both companies to gain access to a larger market, reduce competition between them, and achieve economies of scale. An example of a merger is when Pfizer and Warner Lambert merged together in 1999.
The term acquisition refers to when one business buys all or part of another business’ stock or assets. Mergers differ from acquisitions in that mergers are a consolidation of two businesses and acquisitions are when one company takes over another company. Normally, when one business buys another business through an acquisition, the acquired company doesn’t change its name and it continues to maintain its own organizational structure and conduct business in much the same way it has in the past. Acquisitions are often made to take control of a competitor, or for one company to create financial synergies as a result of the deal. An example of an acquisition is when Salesforce acquired Slack in 2021 for $27.7 billion.
This section will list several types of mergers and acquisitions and explain the strategic rationale behind them. The goal is to understand that there are different strategic reasons to pursue a merger or an acquisition and to understand that strategy through these examples.
Vertical Mergers & Acquisitions are when a company streamlines or expands its operations by taking ownership of more than one stage in its supply chain. Supply chains refer to the entire process of producing a product from sourcing the raw materials to produce the product to selling the end product to customers. This process is more formally known as vertical integration. Here, the business looks to make a deal (merger or acquisition) that will improve the efficiency of operations, reduce costs, or increase the volume of products they can produce. A business can pursue a vertical merger or acquisition in two directions. Vertical integration is referred to as “forward” if it takes the business closer to the end customer. Conversely, it is referred to as “backward” if the deal takes them closer to the raw materials used to make the product.
Horizontal Mergers & Acquisitions are when a company does a deal to acquire or merge with a competing business. The primary motives behind horizontal mergers or acquisitions are the outright elimination of a competitor, and the increased revenue and market share that result from this. This process is more formally known as horizontal integration.
Conglomerate Mergers are mergers between companies that operate in different industries, and often have little in common, but realize a business opportunity to reach a larger market. Conglomerate mergers were notably more common in the 1960’s and 1970’s and this trend seems to have dissipated with time. The main idea behind these types of mergers was of more of a financial nature than of a strategic one. The idea was that older, larger corporations were growing at slower rates and that they could grow through acquisitions faster than by growing organically. Through conglomerate mergers, the new company would hypothetically have a stronger balance sheet. You can learn more about conglomerate mergers here.
Market-Extension Mergers & Acquisitions are deals that occur between companies that make and sell similar products but operate in different markets. An example of a market-extension merger would be if an American semiconductor company merges with a European semiconductor company. Both of these companies make and sell the same products but they are not competitors because they operate exclusively in different markets. This merger would give both companies access to new markets. Market-extension mergers and acquisitions are different than horizontal ones, because these businesses are non-competitive—the American company does not sell in Europe, and vice versa—so the motivation and the strategic rationale is different in market-extension deals than in horizontal deals. In market-extension deals, the intention is to increase market share through expansion into new markets. In horizontal deals, the intention is to eliminate a competitive business first, and to gain market share through that reduced competition.
Product-Extension Mergers & Acquisitions are deals that occur between companies that make and sell different but related products and operate in the same market. The idea behind this type of merger or acquisition is that the new company will be able to bundle or group their services together for increased value, or that they will be able to upsell or cross sell their existing customer base new products. An example of a product-extension deal would be a company that manufactures razors and a company that makes shaving cream merging together. Both of these companies make and sell related, but different products. The opportunity comes from being able to sell the additional products to the same market.
Concentric Mergers & Acquisitions are deals that occur between companies that have different products or services but have the same customer base. These are common in niche businesses. An example would be if the business from the example above, that now manufactures both razors and shaving cream combined, were to purchase a men’s apparel store. Concentric mergers and acquisitions differ from product-extension deals in that the products are totally unrelated. The goal is to sell unrelated things to the same niche market. So, if our business manufactures premium priced razors and shaving cream and their core demographic is professional men with incomes over $100,000 between the ages of 25 and 65, then an acquisition of a high-end men’s apparel store catering to the same niche market is an example of a concentric merger or acquisition. Strategically, product-extension deals are designed to expand a product line or improve an offer through bundling or cross selling. Concentric deals are about differentiation while still specializing in the same niche market. In both, the focus is on keeping the same market, but the intention is to differentiate the product line with a concentric deal, versus extending a product line with a product-extension deal.
