Types of Mergers and Acquisitions.
Merger and acquisition are defined as the business transaction where the control and ownership rights of companies, business units, and business organizations are either acquired by a target company or merged with the target company. There are four types of Mergers and Acquisitions – Horizontal, Vertical, Concentric and Conglomerate M&A.
Let us discuss the four types of Mergers and Acquisitions (M&A) in detail.
#1 – Horizontal M&A
- Horizontal MergerHorizontal MergerHorizontal mergers take place when two companies in the same industry merge. Typically, industry competitors seek such mergers for a variety of reasons, including increasing market share, achieving economies of scale, lowering competition, and so on. generally tends to happen when the target company and target seeking company both occur in the same industry and have the same or equivalent product or product lines or offer similar services to the final consumer.
- It also means the companies operate in the same industry and are in the same or similar stage of production. To cite an example, we can say that two companies both producing laptops, but the target company has a speciality in producing gaming laptops, so the target seeking company to increase its line of products and customer bases either acquires or merges with the target company.
- This type of merger also happens to kill competition to increase its share in the market and increase revenue or profit. Also, the increased production leads to higher economies of scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. , which further leads to a reduced average costAverage CostAverage cost refers to the per-unit cost of production, calculated by dividing the total production cost by the total number of units produced. In other words, it measures the amount of money that the business has to spend to produce each unit of output. of production. This type of merger and acquisition also increases the cost efficiency since repeated and non-productive activities are eliminated from the production.
#2 – Vertical Merger
- Vertical MergerVertical MergerA vertical Merger is the combination of 2 or more business units operating at different production stages of the same supply chain for a common product or service. It often occurs between the product manufacturer & its raw material supplier. is pretty much like horizontal mergers with only a small difference, which is related to the stage of the production. This kind of mergers and acquisition is done between companies operating in the same value chain producing similar goods and services but vary in the stage of production.
- One example to cite can be a car or automobile manufacturer merging or acquiring another company manufacturing tire. Here we see both the companies are operating in the same industry, but the stage of production is different. One firm is operating in the compliment firm to the other. This kind of merger and acquisition is primarily done to provide essential supply to the target seeking company and avoid any kind of shortage in the supply of essential goods.
- In the above example, by merging or acquiring a company producing tire, the car manufacturers reduce the cost of tires, which it initially had to spend and kind of expands the business to supply the tire to other competitive automobile manufactures.
- This kind of merger and acquisition is done to limit the supply of essential goods to competitors, possess a greater chunk of market share, and generate higher revenues and profits. They also must provide cost savings because the essential good is produced inhouse by the company now instead of paying more to another company.
#3 – Concentric M&A
- Concentric merger and acquisition occur when two companies are operating in the same industry and have similar kinds of customer base but offer different types of products and services. The product can be a compliment one, but in no manner will it be the same or identical.
- To cite an example, let us take a case where a company producing laptops merges with a company producing laptop bags. The laptop bag is an essential requirement of every laptop, but we see the product the products are different. Thus when this kind of mergers or acquisition takes place, it is called a concentric merger.
- This kind of merger and acquisition generally occurs to support the customers to buy the product as a bundle offering instead of buying it in a different assembly. Also, it helps the company to diversify its offerings and thus generate higher returns.
- Here the sales of one product will drive the sales of others as we see people who generally buy laptops will also be requiring a bag to carry it on the move. Thus, this leads to the generation of more profits for the company. The company turns out to be a one-stop destination for the consumers where the company offers products linked in some way or the other.
- Usually, it is seen these companies have similar production processes and business markets. This type of merger also has to offer an extended product line. Finally, this kind of merger helps the company reduce the risk of doing business by diversifying the product line.
#4 – Conglomerate M&A
- This type of merger and acquisition occurs when both the target company and target seeking company are different in terms of industry, product offering, and stage of production.
- To cite an example, we can say a merger between a laptop producing company and an electric vehicle producing company. Thus, this kind of merger and acquisition occurs to completely explore new business areas by diversifying the product offerings, which reduces the amount of risk of doing business.
- Mergers and acquisitions play a very important role in today’s more business operating environment, and we often see this happening. It has many benefits to both the target company and target seeking company and brings about a synergetic growth for both.
- Depending upon the vision and purpose, a company generally has the decision of either getting merged or acquired is chosen by the board of directors. Merger and acquisition though it sounds simple and easy, can take a long time to happen as it involves a lot of formalities and due procedures.
This article has been a guide to types of Mergers and Acquisitions. Here we discuss its 4 types Horizontal, Vertical, Concentric, and Conglomerate M&A along with examples and benefits. You can learn more about from the following articles –