Mergers and acquisitions (M&A) are an important part of the business world. Companies may pursue M&A for a variety of strategic reasons, from expanding into new markets to gaining access to technology and talent. There are several different types of M&A deals that companies can consider.
This article will provide an overview of the main categories of M&A transactions, including horizontal mergers, vertical mergers, conglomerate mergers, acquisitions, reverse mergers, and more. Understanding the different types of deals can help companies identify the right M&A strategies to achieve their business objectives.
Whether aiming for growth, efficiency, or gaining a competitive edge, the world of M&A offers companies many options to consider for their strategic goals.
What Are Mergers and Acquisitions?
Mergers and acquisitions (M&A) are strategic transactions where companies combine operations or one acquires another, impacting industries and markets significantly. In a merger, two similar-sized companies form a new entity, while in an acquisition, one company purchases another, often making the acquired company a subsidiary. Takeovers involve one company buying another against its will by acquiring a majority of its shares.
M&A aims to expand market share, diversify product lines, access new markets or technologies, achieve economies of scale, gain competitive advantages, enhance shareholder value, improve operational efficiency, or address competitive pressures.
Mergers and Acquisitions Examples
| Type of Transaction | Companies Involved | Industry | Year |
| Horizontal Merger | Exxon and Mobil | Oil & Gas | 1999 |
| Vertical Merger | Amazon and Whole Foods Market | E-commerce | 2017 |
| Conglomerate Merger | The Walt Disney Company and 21st Century Fox | Media & Entertainment | 2019 |
| Concentric Acquisition | Microsoft and LinkedIn | Technology | 2016 |
| Reverse Merger | Tesla and SolarCity | Renewable Energy | 2016 |
| Hostile Takeover | Kraft and Cadbury | Food & Beverage | 2010 |
| Leveraged Buyout | KKR & Co. and RJR Nabisco | Consumer Goods | 1989 |
Types of Mergers and Acquisitions
Mergers and acquisitions can be classified into various types based on different criteria. These M&As are discussed in detail below:
Horizontal Merger
A horizontal merger refers to the merger of two companies that are in direct competition in the same industry and at the same stage of production. For example, if two airlines were to merge, such as United Airlines and Delta Airlines. The goal of a horizontal merger is to consolidate operations in order to reduce costs and eliminate competition. This allows the merged company to gain greater market share in the industry. However, horizontal mergers can raise antitrust concerns since they reduce competition in the marketplace.
Example: The merger between Exxon and Mobil in 1999 combined two of the largest oil and gas companies in the world. This was a horizontal merger that allowed the newly merged company to reduce redundant operations and achieve significant cost savings and synergies.
Vertical Merger
A vertical merger occurs when two companies at different stages of production or the supply chain in the same industry merge. For instance, an automobile manufacturer merging with an auto parts supplier would be a vertical merger. This allows the acquiring company to control a greater portion of the supply chain and production process. A vertical merger aims to help companies reduce costs and improve efficiency by owning more of the value chain. However, it also reduces supplier competition.
Example: Disney’s acquisition of Pixar in 2006 was a vertical merger, as it brought together Disney’s expertise in marketing and distribution with Pixar’s animation production capabilities. This allowed Disney to have greater control over its animated film productions.
Conglomerate Merger
A conglomerate merger refers to the merger of companies that are involved in completely different and unrelated industries. There are no major operational synergies, but the purpose is to diversify business operations across different product lines and spread out risk. For example, a consumer goods company merging with a technology company would be considered a conglomerate merger.
Example: General Electric’s acquisition of NBC in 1986 was a conglomerate merger that allowed GE to diversify from its core industrial businesses into the media and entertainment industry. This merger combined a manufacturing company with a media content company.
Concentric Merger
A concentric merger occurs between companies that are in related but not directly competing industries. The goal is to allow companies to expand their product lines and enter new markets that are adjacent or complementary to their core business. For instance, a footwear company merging with an athletic apparel company represents a concentric merger.
Example: Amazon’s acquisition of Whole Foods in 2017 was a concentric merger, as Amazon sought to expand from its online retail presence into physical grocery stores, which are a complementary business line. This allowed Amazon to grow its footprint in the grocery segment.
Acquisition
An acquisition refers to one company purchasing a controlling stake or the entirety of another company. This gives the acquiring company access to their resources, assets, technology, and talent. Acquisitions allow companies to expand into new markets or business lines more quickly than organic growth. They can be friendly takeovers with the target company’s approval, or hostile takeovers which go against the target’s management wishes.
Example: Facebook’s acquisition of Instagram in 2012 for $1 billion was an acquisition that gave Facebook control of the rapidly growing social media platform Instagram. This allowed Facebook to benefit from Instagram’s user base and talent.
Reverse Merger
A reverse merger occurs when a private company acquires a controlling stake in a public shell company, thereby gaining the shell company’s public listing status. This allows the private company to become publicly traded quicker and cheaper than going through a traditional IPO process.
Example: The parent company of Chuck E. Cheese, CEC Entertainment, used a reverse merger in 2014 to go public by acquiring a controlling interest in a publicly traded shell company. This gave them a $1.4 billion public listing without an IPO.
Consolidation Merger
In a consolidation merger, two companies combine together to form an entirely new company. The original companies both transfer their assets and liabilities to the new entity and cease to exist independently. This differs from an acquisition where one company survives.
Example: The consolidation merger of Sirus and XM satellite radio in 2008 saw the companies merge to form Sirius XM, a new public company with assets and operations from both firms.
Asset Purchase
In an asset purchase, the acquiring company only buys select assets of the target company, not the entire entity. This allows the buyer to leave behind liabilities and obligations they do not want to take on. Only desired assets, property, and licenses are transferred over.
Example: When IBM sold its PC business unit to Lenovo in 2005, Lenovo only purchased IBM’s PC-related inventory, patents, trademarks and other assets. It did not acquire all of IBM’s liabilities and debts.
Tender Offer
A tender offer is when an acquiring company appeals directly to the target company’s shareholders to purchase their stock shares. This allows the acquirer to take control of the target company without the consent of the target’s management or board.
Example: In 2016, Sanofi made a tender offer directly to the shareholders of Medivation to acquire the pharmaceutical company, bypassing resistance from Medivation’s management.
Diversification Merger
A diversification merger occurs when two companies from completely different and unrelated industries merge together. The purpose is to diversify revenue streams, spread out risk across multiple business lines, and expand into new markets.
Example: Walt Disney Company’s acquisition of ABC in 1995 was a diversification merger, allowing Disney to diversify from entertainment into news media and broadcasting.
Subsidiary Merger
A subsidiary merger takes place between a parent company and its subsidiary or vice versa, whereby the two entities combine. The goal is often to simplify corporate structure and reduce tax and regulatory burdens.
Example: In 2013, Oneok Partners acquired its parent company Oneok Inc. in a subsidiary merger to simplify operations and eliminate parent-subsidiary regulatory requirements.
Triangular Merger
In a triangular merger, a subsidiary formed by the acquiring company is used to merge with the target company. This type of merger provides tax and legal advantages compared to other merger structures.
Example: Google utilized a triangular merger structure for its acquisition of YouTube in 2006. It formed a subsidiary called “Charlie’s Acquisition Corporation” to initiate the merger.
Mergers and Acquisitions Strategy
Before pursuing M&A deals, companies must develop a strategy that aligns with their financial and operational objectives. Key components include:
- Identifying and evaluating potential acquisition targets or merger partners based on synergies.
- Conducting valuation analysis and due diligence on risks and deal breakers.
- Structuring the deal through the most advantageous deal terms and medium of exchange (cash, stock, etc).
- Determining the appropriate acquisition approach, whether friendly merger, hostile takeover, or leveraged buyout.
- Creating an integration plan to combine operations, culture, and systems.
- Assessing regulatory implications and seeking approval if needed.
- Ensuring the transaction is accretive in value and has a strategic alignment.
Wrapping Up
Mergers and acquisitions can significantly reshape industries and redefine business landscapes when executed strategically. Companies must carefully evaluate deals to ensure they align with corporate vision and synergies are truly achievable. By understanding the different types of M&A and key strategic considerations around valuation, due diligence, integration planning, and regulatory implications, firms can pursue transactions that maximize value creation.
With the right deal rationale and execution, mergers and acquisitions can be game-changing moves that deliver tremendous growth opportunities and competitive advantages. Ultimately the success of any deal comes down to realizing strategic objectives and effectively integrating people, processes, and systems to capitalize on anticipated synergies.
Neil Duncan, a professional in business innovation and management, has a deep interest in writing and sharing his voice by publishing articles on different b2b and b2c websites/blogs like this. He currently serves as the Vice President in AZ.
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