‘Mergers and acquisitions’ (M&A) refers to any business transaction in which two or more entities consolidate company ownership and assets and move forward as a single entity.
It’s complex enough to run one business, let alone get two working together, so it may seem like a no-brainer to merge when company goals are aligned. There are many benefits, but much like everything else in business, it’s not as simple as it sounds.
We’ve broken it down into seven basic categories to help you decide if a merger or acquisition is the right choice for your company.
7 types of mergers and acquisitions
While there are multiple variations of mergers and acquisitions, we can divide them into the following seven categories:
- Horizontal
- Vertical
- Conglomerate
- Market extension
- Product extension
- Reverse merger
- Acquihire
Each approach varies slightly in its method, purpose, and results. The best type of merger for any business depends on its individual circumstances.
For instance, if an organization wanted to expand globally while increasing its reach within the same market, it would undergo a market extension. However, it would choose a conglomerate if it wanted to enter a new market and diversify its existing product line with new offerings.
Read on for a detailed breakdown of the different merger and acquisition examples.
1. Horizontal
A horizontal M&A occurs when companies operating in the same industry or sector, often at the same level in the value chain, join together to form one entity. The companies are usually direct competitors with similar product lines.
Companies undergo horizontal integration to achieve market expansion, grow in size and revenue, attain economies of scale, increase market share, or eliminate competition. Horizontal mergers also allow mature companies that have reached their peak to continue growing and maintain relevance—for instance, by merging with smaller players in their industry with newer product variants.
Horizontal merger/acquisition example
The Disney+ Hotstar merger is a perfect horizontal merger example. Disney+ is the Walt Disney Company’s online subscription streaming platform, while Hotstar is Star Network’s streaming platform in India.
After Disney’s parent company, 21st Century Fox, acquired Star India in 2019, Disney integrated Hotstar into its Disney+ platform, rebranding it as Disney+ Hotstar. Disney then removed much of its content from competing platforms like Netflix to gain a larger market share.
Disney+ Hotstar now holds 29% of the streaming market share in India, outpacing top competitors like Amazon and Netflix.
2. Vertical
Vertical M&As involve companies operating at different production or distribution stages along the supply chain within the same industry for the same good or service. By merging, they gain more control over the supply chain, improve operational efficiency, reduce production costs, and increase revenue.
Vertical merger/acquisition example
An example of a vertical acquisition is the eBay and PayPal’s integration.
At the time of the merger, eBay transactions were responsible for two-thirds of PayPal’s payment volume. PayPal became a wholly-owned subsidiary of eBay in 2002, expanding both companies’ networks and reducing operational costs.
A changing competitive landscape led eBay to spin off from PayPal in 2015, and the two companies became independent again.
3. Conglomerate
Conglomerates involve companies that operate in unrelated industries or business lines. Unlike horizontal and vertical acquisitions and mergers, which focus on synergies within the same sector, companies usually form conglomerates to achieve diversification.
The goal may be to spread risk, access new markets, or leverage complementary strengths.
Conglomerate merger/acquisition example
An example of a conglomerate is Amazon’s acquisition of Whole Foods in 2017. By acquiring Whole Foods, Amazon expanded its grocery offerings and increased its Prime membership benefits.
4. Market extension
Market extensions involve companies operating in different geographic markets with similar products or services. By merging, they expand their market reach and customer base.
Market extension merger/acquisition example
InBev’s acquisition of Anheuser-Busch in 2008 and its later acquisition of SABMiller in 2017. InBev was a Belgian-based international brewing company and Anheuser-Busch was an American brewing company headquartered in St Louis, Missouri, known for creating the Budweiser brand.
When InBev acquired Anheuser-Busch in 2008 and formed Anheuser-Busch InBev, the acquisition resulted in one of the top five consumer product companies worldwide. They acquired SABMiller in 2017, establishing a 500-brand portfolio across 50 countries.
5. Product extension
Product extensions occur when companies in related industries with similar products or services merge to expand their offerings.
The goal is to boost their product line, reduce costs, cross-sell products or services to each other’s customer bases, and achieve economies of scale. Some people call product extensions ‘concentric mergers.’
Product extension merger/acquisition example
PepsiCo’s acquisition of Pizza Hut. PepsiCo, a leading global soft drink brand, understood it could drastically expand its consumer base by acquiring the growing pizza chain.
When Pizza Hut became a division of PepsiCo in 1977, everyone who bought a pizza from Pizza Hut could only buy drinks from Pepsi’s line. Within a year of the acquisition, sales reached roughly US$436 million.
6. Reverse merger
Some people call reverse mergers reverse takeovers (RTO) or reverse initial public offerings.
In a reverse merger, a private company with strong prospects that’s eager to go public acquires a dormant or inactive publicly traded shell company with few or no operations and limited assets. The private company then gains access to the public market while forgoing the standard initial public offering (IPO) process.
Reverse merger example
Burger King’s 2012 acquisition of Justice Holdings, a publicly traded shell company. The move brought Burger King back onto the New York Stock Exchange after a two-year hiatus in which it operated as a private company.
Another example is Tesla’s acquisition of solar panel installation company SolarCity in 2016. While Tesla was already a publicly traded company, acquiring SolarCity allowed it to diversify its product offering and expand into the solar energy sector without undergoing an IPO. The move also facilitated lower hardware and installation costs and improved manufacturing efficiency.
7. Acquihire
The term “acquihire” is a combination of “acquisition” and “hire.” In an acquihire, an organization is primarily interested in obtaining the skills and expertise of another organization’s employees rather than its products, services, or other assets. One company buys a smaller company, such as a startup, to add the smaller company’s talented employees to its own workforce.
While this approach can involve unique global compliance challenges, it allows the acquiring company to quickly onboard a team with specialized skills or domain expertise, often in technology, product development, design, or engineering.
Acquihire example
Facebook’s acquisition of many startups since its foundation are great examples of acquihires. For instance, the social media giant acquired Chai Labs in 2012 for US$10 million primarily for their skilled team. Facebook’s owner Mark Zuckerberg has claimed that he rarely buys companies for the companies themselves, but rather for their people.
FAQs
What is the difference between a merger and an acquisition?
The main difference between a merger and an acquisition is that in a merger, two companies combine operations to form a new entity, though one entity may survive. In an acquisition, one company absorbs another company’s talent and assets into its own structure without creating a separate entity.
Consider the Kraft Foods and H.J. Heinz merger, for instance. The two companies joined in early 2015 to form a separate entity called Kraft Heinz Company. At the time, Kraft Heinz became the fifth-largest food and beverage business worldwide and the third-largest in the U.S.
Conversely, Pfizer’s purchase of Warner-Lambert in 2000 was a typical acquisition. Pfizer absorbed all of Lambert’s operations and assets, including their rights to the popular drug Lipitor, and continued operating under the same name while Warner-Lambert ceased to exist.
What is the difference between a merger and consolidation?
Although mergers and consolidations are methods for combining companies, they have different characteristics and legal implications. In a merger, one or more companies may survive as the new business; however, consolidations dissolve all original companies and form a new entity.
In a merger, previous owners maintain a proportionate ownership stake, and their financial statements include the results of the individual merged entities. Conversely, a consolidation forms a new entity with a unique ownership structure and combined financial statements.
Remember, the term ‘merger’ is an umbrella term that people often use to refer to different types of M&As. However, when comparing a merger with a consolidation, the differentiating factor is that a consolidation always forms a new entity, whereas with a merger, one or more entities may survive.
Google’s purchase of Android is a perfect example of a merger. Since Google bought the small, unknown mobile startup company in 2005, both companies have continued to exist as separate entities with unique branding.
Conversely, when Raytheon Company joined forces with United Technologies Corporation (UTC) in 2020, they underwent consolidation. Both companies dissolved to create Raytheon Technologies, a new aerospace and defense giant with a larger portfolio and enhanced market reach.
What is a friendly merger and acquisition?
Friendly mergers and acquisitions occur when the participating companies agree to the transaction’s terms and conditions. The target company’s shareholders and board of directors approve the deal based on the offer details and work cooperatively with the acquiring company to complete the transfer.
A friendly merger is the opposite of a hostile takeover, where one company takes control of another against its will.
What is a hostile takeover?
In a hostile takeover, one company tries to take control of another company without approval from the target company’s board of directors. Organizations usually initiate hostile takeovers by directly approaching an entity’s shareholders with a tender offer or convincing the stockholders to replace management with a board that would permit the takeover.
In other words, the target company’s board of directors doesn’t willingly approve the acquisition, hence the term “hostile.”
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If you learned anything from this article, it’s probably that there’s more to M&As than you thought. They can be very complex (especially when crossing international borders) and making sure everything is as simple as locating multiple experts in international finance, corporate law, employee regulations, benefits management, etc., etc., etc.
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This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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