Types of Acquisition Strategy
Types of acquisition strategy comprise horizontal, vertical, congeneric, conglomerate acquisitions. The acquisition is a part of corporate expansion strategy, and its categorization is based on the product line, industry, and business activities.
The acquisition helps to see the new market, customer base and to obtain the synergy gains. In addition, it will give an edge to a firm and bring maturity in the firm’s operations. Thus, acquisitions are considered the starting step towards achieving market leadership.
Let us discuss each of the four types of acquisitions in detail –
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List of Top 4 Types of Acquisition
#1 – Horizontal Acquisition
The biggest factor to be factored in drafting any business formula in the market is competition. An entity thriving at the same production stage, capacity, and serving the same class of customers will be considered the competitor in the market. If the entity has to grow in the market, it will have to maximize its market share constantly. Either entity will have to serve better quality products or eliminate the competition by acquiring the competitor. It is termed a horizontal acquisition.
Example of Horizontal Acquisition
Company A and Company B produce cell phones. Now, if Company A acquires Company B, company A will be able to serve the customer base of Company B also under its brand name. It will help in penetrating the marketPenetrating The MarketMarket penetration is calculated as how much the product or service is being used compared to its total market and how it creates a position in the market, especially in the primary stages of setting up the business.read more and, as a result, will act as the market leader. Presently, such acquisitions are highly visible in the information technology sector. Tech giants keep acquiring technology startups and will leverage their customer base. It allows them to cover the uncovered area and make their presence feel across the globe.
#2 – Vertical Acquisition
To have all the activity related to any business gives synergy benefits to any entity. Either backward integrationBackward IntegrationBackward Integration is a vertical integration type in which a Company buys or integrates with its supplier firms to improve efficacy, save costs, & gain more control over the production process.read more or forward integrationForward IntegrationForward integration is a strategic approach where the companies move ahead in the supply chain and take over the distribution and retail activities. The purpose of this vertical integration is to achieve cost efficiency.read more can make a vertical acquisition. For example, a wholesaler with a monopoly in the trading acquiring a manufacturing unit producing the same commodity will be considered backward integration. It will help in obtaining the inventories at highly reasonable rates. On the other hand, if the same wholesaler acquires retail stores, it will be considered forwarding integration. It will give direct customer-facing, which will help earn the retail level profit. The above process is termed a vertical acquisition.
Example of Vertical Acquisition
Target Corp. is the best example of vertical acquisition. The company is one of the largest retail chain holders in the United States. It has its own manufacturing unit, distribution channels, wholesale and retail stores, which cover a large customer base and remove any intermediary.
#3 – Congeneric Acquisition
Modern society is highly lacking in time. Due to this only, shopping malls have thrived in the market. People prefer a one-stop-shop and try to optimize time for shopping by acquiring all the necessities from the same roof. It helps individuals satisfy their various needs from the same vendor, saving time and putting pressure on them to ensure the better quality of the products. Moreover, an entity will charge premiums from the customer to offer the various products together, which will help satisfy the customer’s single need. It helps the acquirer enjoy the different areas of the same industry, serving the same customer.
Example of Congeneric Acquisition
Citi Group is the global banking corporation. Its core business focuses on providing banking services to customers. The major crunch is large corporations whose presence is there across the globe. Such large corporations have executives frequently traveling throughout the world for business meetings. For such executives, there is a huge need to take travel insurance. Citi Group identified this requirement of travel insurance and acquired Travelers Insurance Co. With the help of this, Citi Group is now able to serve large corporate clients, even travel insurance in addition to banking services.
#4 – Conglomerate Acquisition Type
Conglomerate Acquisition occurs in between entities with a completely different product lineIndifferent Product LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more, different geographies, and different customer base and has a completely different business model. It means such firms will have nothing in common with them, and they plan to undertake such acquisitions to diversify their risk and try to cover the new market. Such types of acquisition will help provide the existing products to the customers of the newly acquired company and vice versa. Such a diversification strategy helps the firm diversify the business, synergy benefits, increase customer base, and achieve better economies of scale.
Example of Conglomerate Acquisition
The best example of a conglomerate is the merger between PayPal and eBay. Around 2002, PayPal was not able to maintain its market reputation. The e-commerce giant acquired PayPal just by paying around a billion dollars at that time. However, presently eBay has a market value of a hundred billion dollars. eBay had spanned off PayPal after its acquisition. As a result, PayPal has revolutionized the payment system and challenged the traditional payment method. These acquisitions are considered a benchmark step for bringing modern change in Silicon Valley.
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This article has been a guide to Types of Acquisition. Here we discuss the top 4 types: Horizontal Acquisition, Vertical Acquisition, Congeneric Acquisition, Conglomerate Acquisition, and examples. You can learn more about financing from the following articles –
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