Definition
Mergers and Acquisitions Types refer to the different classifications of corporate strategies where two companies integrate. These include horizontal mergers (between competitors in the same industry), vertical mergers (between a company and its supplier or distributor), conglomerate mergers (between companies in entirely different industries), and congeneric mergers (between companies in the same market but do not offer same products). Each type impacts the company’s business and financial structure in different ways.
Key Takeaways
- Mergers and Acquisitions (M&A) refer to consolidation of different companies or assets. They can occur in different forms, each with distinct characteristics: merger is the combination of two companies to form one, while acquisitions occur when one company takes over another.
- The different types of M&A include horizontal merger (between firms in the same industry), vertical merger (between customer and company), conglomerate merger (between firms in different industries), and market-extension and product-extension mergers (which expand the firm’s customer base or product line).
- The success of any M&A essentially depends on its ability to increase shareholder value. This can result from cost efficiencies, revenue synergies, tax benefits, diversification, or other strategic benefits. However, not all M&As succeed, with common pitfalls related to overpayment, culture clash, or poor integration planning.
Importance
Understanding the types of Mergers and Acquisitions (M&A) is crucial because they form a significant part of corporate finance strategy.
It helps businesses grow, consolidate, diversify or reduce risk along vertical or horizontal integrations, or through conglomeration.
The nature of the merger or acquisition – be it horizontal, vertical, conglomerate or concentric – can significantly impact how the combined entity can achieve economies of scale, access new markets, or acquire new technologies or resources.
Therefore, M&A types have direct implications on the value creation potential and the strategic direction of firms involved, necessitating a thorough understanding of these terms among stakeholders.
Explanation
Mergers and Acquisitions (M&A) Types are broad strategies regularly employed in corporate finance, aimed at enhancing and expanding business growth, capability, or profitability. The purpose behind these actions directly adhere to a company’s overall corporate strategy and objective of improvement. Mergers essentially involve the amalgamation of two companies into a single entity, typically as a stratagem to increase market share, achieve economies of scale, explore new sectors, and consolidate balance sheets.
Acquisitions, on the other hand, involve one company (acquirer) procuring another company (target), providing the acquirer with a chance to swiftly increase its assets, reduce competition, or gain an operational advantage. Each type of M&A serves specific purposes and is used under varying circumstances. Four main types of M&As often seen in practice are horizontal, vertical, conglomerate, and congeneric mergers.
A horizontal merger occurs between businesses that are direct competitors, offering the same service or product, primarily to expand the company’s market share. Vertically merged companies operate along the same production line, with the aim of optimizing the supply chain, and thus cost efficiency. Conglomerate mergers connect firms with diverse business activities with the main motive of diversification.
Congeneric mergers, although they operate in the same market, vary in their product/service line, which helps diversify the product range and customer base. Through these types, M&As establish a way to achieve strategic goals and enhance shareholder value more effectively.
Examples of Mergers and Acquisitions Types
Disney and Pixar: Disney acquired Pixar Animation Studios in
This is an example of a Horizontal Acquisition, where two companies in the same industry, in this case entertainment and animation, merge together. Disney saw the acquisition as a way to boost its animation department which was struggling at the time.
Facebook and Instagram: Facebook acquired Instagram in
This is an example of a Product Extension Merger. Facebook and Instagram are different social media platforms, but they share common features such as posting pictures and interacting with others online. Under Facebook, Instagram has achieved exponential growth.
Amazon and Whole Foods: In 2017, Amazon acquired Whole Foods Market, a move that signaled the tech giant’s intent to expand its reach into the grocery market. This is an example of a Market Extension Merger, as both Amazon and Whole Foods operate in the retail industry, but they serve different markets (e-commerce and traditional grocery respectively). This allowed Amazon to extend its footprint in the brick-and-mortar and grocery market.These three examples show acquisitions or mergers between companies either in the same industry or in complementary industries to increase their market reach, improve their product portfolios, or enhance their operational efficiencies.
Mergers and Acquisitions Types
What are Mergers and Acquisitions?
Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. A merger is a legal consolidation of two entities into one, whereas an acquisition refers to one entity taking ownership of another entity’s stock, equity interests or assets.
What are the types of Mergers?
There are five main types of mergers: conglomerate merger, congeneric merger, market extension merger, product extension merger, and horizontal merger. Each has its own characteristics and purpose.
What are the types of Acquisitions?
Acquisitions can be classified into three types: management acquisitions, also known as a management-led buyout (MBO), friendly acquisitions, and hostile acquisitions. Similar to mergers, each acquisition type serves a different purpose and involves different processes.
What is the difference between a merger and an acquisition?
The term merger implies a combining of equals, two companies coming together to form one new company. Acquisition, on the other hand, involves one company completely taking over another company, and establishes itself as the new owner. The target company thus ceases to exist.
Why do companies engage in mergers and acquisitions?
Companies use mergers and acquisitions for various reasons, such as to grow in market share, to gain synergies, to diversify their product offerings or markets, to reduce financial risk, and for many others strategic and financial reasons.
Related Entrepreneurship Terms
- Horizontal Merger
- Vertical Merger
- Concentric Merger
- Conglomerate Merger
- Reverse Merger
Sources for More Information
- Investopedia: This educational website provides in-depth articles and videos on wide-ranging financial topics, including mergers and acquisitions.
- Forbes: Forbes is a globally recognized media brand that publishes articles on finance and investing, often covering relevant news on mergers and acquisitions.
- McKinsey & Company: A global management consulting firm that regularly publishes insights into different industries, including finance and Mergers & Acquisitions.
- Harvard Business Review: HBR offers a wide variety of resources on Mergers and Acquisitions, including professional case studies, reports, and articles.
