A Guide to the 5 Types of Mergers and Acquisitions
There are a number of types of mergers and acquisitions. Here are the most common five.
The 5 Types of Mergers and Acquisitions
Written by Global Expansion
11 | 12 | 20
Mergers and Acquisitions |
4 minute read
Mergers and acquisitions (M&A) - one of the most well-known methods of expanding your company, either nationally or internationally. Put simply, it’s when one company combines with another. For more complexity, M&As is a term that describes the consolidation of either companies or assets.
There’s a wide number of these methods, ranging from mergers to tender offers to management acquisitions. In this blog, you’ll discover five of the most valuable M&A types that could one day expand your business.
Vertical mergers are simple and common. It’s done to combine two companies that provide similar or common goods or services, in an effort to bring together different supply chain functions that either organization might operate with.
The hope here is that the merger will create ‘synergies’. Essentially, this means that the two companies will run more efficiently as one with the bigger organization benefiting from the increase in assets and supply chain operations.
In some cases, these will be two companies that aren’t actually competitors - but their coming together makes sense logistically. For example, a car manufacturer may merge with a parts supplier so that their common processes can be done with closer proximity and visibility. The car manufacturer gains better control over the price of parts and the parts supplier benefits from a consistent stream of business.
At the end of the day, it’s about creating something that’s greater than the sum of its parts.
2. Horizontal Merger
Horizontal mergers are a little different. Where a vertical merger operates between two companies that may not happen to be competitors, a horizontal merger will operate between two or more companies that are competitors.
These organizations will work within the same space and usually offer the same goods or service. These are more common in industries that have fewer businesses offering the same product, as there’s an increased amount of competition. A successful merger or acquisition within this market has high potential gains.
For example, imagine McDonald’s and Burger King were to combine. This would be a textbook example of a horizontal merger - two companies that operate within the same space, the merger of which would create an entity with a ‘supersized’ market share.
Cornering more of the market and joining certain operations, like manufacturing, may work to decrease overall operating costs. For smaller businesses, it’s a fantastic way of opening up markets within other countries that may not have been accessed yet.
3. Conglomerate Merger
Conglomerate mergers are unlike the first two we’ve discussed. This is a merger or acquisition that takes place between organizations that have totally unrelated business activities.
It might seem counterintuitive, but mergers like these are beneficial. A merger like this can increase market share, diversify a service, asset and stock portfolio and also offer the opportunity to cross-sell products.
There are two divisions of the conglomerate merger:
Pure: This is where the organizations involved have no common products or services at all.
Mixed: This is where the organizations involved may have a certain small number of similar products.
A famous example of a successful conglomerate merger is when Disney acquired Pixar. Ultimately, mergers like this can be about portfolio diversification. When one product or sector is performing poorly, it’s hoped that the others can compensate for any losses.
4. Market Extension Merger
Imagine you’re an organization that operates in a specific market. Now, there’s another organization that offers the same product or service, but in a different market. You’re looking for a way into that market in an effort to increase your market share and client base. A market extension merger is the way to go about this.
A great example comes from all the way back in 2002, when RBC Centura acquired Eagle Bancshares Inc. Now, RBC Centura (RBC Bank) is a Canadian-owned venture that was looking to grow its operations in North America. Acquiring Eagle Bancshares Inc was the best way to go about this, as it allowed them to expand into the metropolitan Atlanta region.
At the time, this gave RBC Centura access to the skills and experience of an extra 283 employees, almost 90,000 accounts and up to $1.1 billion in assets.
5. Product Extension Merger
Product extension mergers are similar to market extension mergers. These involve two or more companies that both deal in similar or related products and operate in the same market. For example, also back in 2002, Broadcom acquired Mobilink Telecom Inc in order to combine the handset product designs of the latter with the wireless, Bluetooth products of the former.
This is a classic example of a product extension merger, where the merging companies can group their products together, in order to share expertise, technology and designs, as well as gain access to a much bigger set of customers. In turn, this has the potential to lead to much higher profits.
At the end of the day, mergers and acquisitions bring two or more companies together. It’s the reasons for that and the methods of M&A that can differ. Overall, an M&A offers a potentially lucrative, exciting and advantageous opportunity for expanding businesses - especially to those that are expanding overseas.
Now, even though it’s advantageous, there are risks involved, like any expansion opportunity. These pitfalls can sometimes be subtle, so it’s worth reading up on the potential issues that your business might face if you’re considering an M&A. To gain this insight, check out our guide.
Mergers and Acquisitions: The Common Pitfalls and How To Evade Them
M&A is a hot topic. For every success, you hear a horror story. There are a number of complexities that need to be properly navigated - especially when it comes to merging with or acquiring a business that resides overseas.
In our guide, you’ll be able to discover the common pitfalls, the reason why lots of M&As fail, how to get started and why Global Professional Employer Organizations are critical partners in this type of expansion.
To get started with your guide, simply click the button below.