6 Different Types of Mergers and Acquisitions

Mergers and acquisitions happen every day. Companies within the same industry or different industries merge to widen their market share or diversify their options. Some takeovers are smooth and friendly, and stem from a logical and strategic point of view; others are hostile, where one of the companies is in disagreement and doesn’t want to accept the inevitable outcome of a merger.

There are several reasons mergers and acquisitions take place. Some are meant to keep a failing business afloat by providing it with capital and a better market, while others are as a result of a company is seeking to diversify into other sectors within the same market. Below are six types of mergers and acquisitions.

1. Horizontal Mergers

Horizontal mergers and acquisitions occur when two or more companies within the same industry that provide the same products and services to the final consumers merge into one giant company. These mergers are designed to get rid of competition and increase the market share of the super company.

With horizontal mergers, companies join to form a larger super company with a more substantial market presence compared to smaller companies within the same industry. The final merged company will have increased profit margins and better economies of scale due to its size. An excellent example of a horizontal merger would be if a company like Coca Cola and Pepsi would merge into one.

2. Vertical Mergers

Vertical mergers are quite similar to horizontal mergers in that they take place between companies that are in the same industry and provide the same goods and services. The main difference, however, is that both companies are at different levels of production. This mostly happens when a larger company in the same industry as a smaller one merges with the smaller company to give a lifeline to the smaller company and to eliminate other competitors.

Vertical mergers are either smooth or hostile takeovers depending on the agreements and position of the smaller company. Due to the complexities of these mergers, business lawyers and legal help are often required to facilitate the acquisition process.

3. Conglomerate Mergers

Conglomerate mergers take place between two or more companies that are in different industries and at varying levels of production. This usually takes place when a company wants to expand into other markets aside from its primary market or industry. There are many reasons a company would acquire another from a different sector. For the acquisition to be termed successful, the merger has to be feasible enough to ensure both sides of the business are doing well and making the desired profits.

4. Concentric Mergers

Also known as product extension mergers, concentric mergers take place when two or more companies within the same industry, but providing different goods and services, combine to take advantage of the broader market. The goods and services provided by both companies could be complementary, which makes it a viable merger as the company would now have a broader market for its products and services.

A good example is when Sony, a company that produces DVD players, bought Columbia Pictures, which used to create films. This made it possible for Sony to start producing movies, which later paved the way for the Sony Blu-ray discs of films. Such a merger, where a company extends its product range, is known as a concentric merger.

5. Market Extension Merger

This type of acquisition happens between companies that produce the same goods and services but in different markets. This is mostly done to give a company a more extensive market base for its products and services. For example, if a company that produces cars in North America merges with a company that builds vehicles of the same calibre in Europe, this is a market extension merger.

This is because the North American company will be able to penetrate the European market through the merger while the European company will also get access to the North American market. These mergers are mostly seen in places where two companies that are big in respective regions come together to take advantage of the areas in which the other company commands a sizeable market share. This way, they get to share the other companies’ resources as well as goodwill in those regions.

6. Strategic Mergers

Strategic acquisitions are those that ensure the companies involved gain a better outcome than they would if they remained independent. There are several reasons a company would seek a strategic acquisition. For example, a company may notice the great potential in another industry, which would put it in a strategic position if it acquires a company in that industry. Another reason could be if a smaller company is acquired by a larger company to access its economies of scale.

Mergers are essential, sometimes inevitable as businesses seek to expand into new territories and increase their market share. There are many reasons behind some of the most iconic mergers in history, but all of them had the goal of providing better products or reaching wider markets.

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