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The Different Types of Mergers and Acquisitions

Mergers and Acquisitions, goods or services, target company, Acquisitions, Mergers

In an era when businesses scale up fast, and startups turn into unicorns practically overnight, the pace of change can be frenetic. In industries such as technology, retail, and finance, for example, changes force organizations to be constantly on the lookout for growth opportunities and strategic alliances. This can sometimes mean exploring the possibility of a partnership or outright purchase.

Merger and Acquisition (M&A) impact not only the businesses directly involved in the deal but also the broader industry in which they belong. But while the concepts of both merger and acquisition entail a change in ownership or control of a company, they still exhibit a few technical differences.

Merger vs. Acquisition

A merger takes place when two or more companies come together to form a new entity, but they negotiate as equals. The deal clearly identifies how power will be shared or handed over to a specific group, but the bottom line is that the negotiations are geared toward the mutual benefit of all parties.

Most deals, however, involve the outright acquisition of one business by another. An acquisition, therefore, results from a takeover or when an organization purchases the assets or majority shares of a target company and exercises full control over the changes that will occur in the newly acquired group. The buyer can thus choose to absorb, restructure, or even dissolve the target company.

What are the different types of mergers?

Depending on the type of companies involved, their respective positions in the supply chain, and their industry, a merger can take on one form or the other:

  1. Horizontal merger – This takes place when the companies set to join forces sell the same or similar end products or services to their target market (e.g. two payroll software companies).
  1. Vertical merger – This occurs between two companies that produce goods or services at different points in the supply chain (e.g. a mobile phone company and a chipmaker).
  1. Concentric or congeneric merger – This happens among companies in the same industry that provide different goods or services to the same target market (e.g. a gaming device manufacturer and a game developer).
  1. Conglomerate merger – This agreement results from the merger of two companies in different industries. The aim is to diversify into a new sector (e.g. an online retailer and financial tech company).

What are the different types of acquisitions?

A company that aims to take control of another business will employ one of the following strategies:

  1. Value creation – This approach entails purchasing a target company, enhancing its operations and market position, and later divesting it for a profit.
  1. Consolidation – This occurs when a larger company subsumes a competitor in a highly saturated market.
  1. Acceleration – This happens when a larger company purchases a smaller company and leverages resources to speed up market access to the goods or services.
  1. Resource acquisition – This approach enables one company to gain an advantage by purchasing a rival that has better resources, tools, and market positioning, instead of having to build its own capacity from the ground up.
  1. Speculation – This occurs when a larger company purchases a smaller company that offers an innovative product in a bid to capitalize on its growth potential.

Why do companies resort to M&A?

M&As can spur greater business activity, encourage healthier competition, and compel businesses to deliver better goods and services to consumers. There are a number of reasons why a company would want to consider an offer or make one:

1. To enhance performance

M&As can set companies on the right path since a deal outlines terms to improve performance and market positioning greatly. Through economies of scale, integration increases their resources, streamlines their operations, and eventually gives them a larger market share. Such changes can yield higher revenue and profits.

2. To eliminate excess capacity

An increase in the number of new players in the industry can lead to a saturated market. With more suppliers offering the same products or services, prices will fall. Hence, businesses merge or acquire competitors to retain equilibrium between supply and demand. By removing excess capacity, companies become leaner and can focus on quality better.

3. To build on existing resources

Building capacity from scratch can take years and cost companies more than if they simply acquired existing technology and skills from a competitor or partnered with another company for a strategic alliance. This simplifies the process of managing and accelerating growth.

 

4. To boost smaller players

Some companies may find that they are too small to thrive competitively in their industry. Being open to M&A can help them achieve their business goals by partnering with a larger company equipped with more resources necessary to speed up time-to-market.

5. To spark healthy competition

M&As prompt better competition among players. Smaller businesses can often disrupt price competition by undercutting competitors. Through integration, an industry can maintain a balance between new market entrants and the more established players by refocusing the competition on the quality of their offers.

Author Bio: Eric is a serial entrepreneur with a high degree of experience in both fields. 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 & Acquisitions, having had first hand experience on both ends of the deal.

Today, he is known as a dynamic and passionate visionary with remarkable M&A instincts targeted at achieving highly-strategic goals. Eric has successfully completed multiple cross-border M&A transactions in the US and Asia and has widened his focus to the Staffing and Recruiting, Healthcare and IT industries.


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