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. It will not only give the edge to a firm but will also bring maturity in the maturity in the operations of the firm. Thus, acquisitions are considered as the starting step towards the achievement of market leadership.
Let us discuss each of the 4 type of acquisitions in detail –
List of Top 4 Types of Acquisition
#1 – Horizontal Acquisition
In the market, the biggest factor to be factored while drafting any business formula is competition. If the entity has to grow in the market, it will have to constantly strive to maximize its share in the market. In the market, an entity, which is thriving at the same stage of production, capacity, and serving the same class of customers, will be considered as the competitor. In order to cover the market, either entity will have to serve better quality of products or try to eliminate the competition. Competition can be easily eliminated by acquiring the competitor. It is termed a horizontal acquisition.
Example of Horizontal Acquisition
Company A and Company B produce a cell phone in the market. Now, if Company A acquires Company B, then 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. and, as a result, will act as the market leader. Presently, such types of acquisitions are highly visible in the Information Technology sectors. Where tech giant companies keep on acquiring technology startup and will leverage the Customer base covered by them, it allows them to cover the uncovered area and try to make their presence feel across the globe.
#2 – Vertical Acquisition
To have all the activity related to any business gives synergy benefit to any entity. A vertical acquisition can be made by 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. 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.. Any wholesaler who is having a monopoly in the trading, it acquires any manufacturing unit producing the same commodity, will be considered as backward integration. It will help in obtaining the inventories at highly reasonable rates. If the same wholesaler acquires retail stores, it will be considered as forwarding integration. It will give direct customer-facing, which will help in earning the retail level profit. The above process is termed a vertical acquisition.
Example of Vertical Acquisition
The company, named Target Corporation, is the best example of vertical acquisition. The company is one of the largest retail chain holders in the USA. It has its manufacturing unit, its distribution channels, own wholesale, and retail stores, which covers a large number of customer base and helps itself by removing any kind of intermediary.
#3 – Congeneric Acquisition
Modern society is highly lacking in time. People prefer a one-stop-shop and try to optimize time for shopping by acquiring all the necessities from the same roof. Due to this only, shopping malls have thrived in the market. It helps individuals to satisfy their various needs from the same vendor, which will not only save time but will also put pressure on them to ensure the better quality of the products. Moreover, an entity will be in a position to charge premiums from the customer to offer the various products together, which will help in satisfying the single need of the customer. It helps the acquirer to enjoy the different areas of the same industry, which will be served to the same customer.
Example of Congeneric Acquisition
Citi Group is the global Banking Corporation. Its core business focuses on providing banking services to the customers. The major crunch of it is large corporates whose presence is there across the globe. Such large corporates have executives who are 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 Company. With the help of this, Citi group is now able to same large corporate clients, even travel insurance along with banking services.
#4 – Conglomerate Acquisition Type
Under these types of acquisition, Conglomerate Acquisition occurs in between the entity that is a completely indifferent 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., different geographies, and different customer base and has a completely different business model. It means such firms will be having nothing common in them, and they plan to undertake such acquisition to diversify their risk and try to cover the new market. Such types of acquisition will help to provide the existing products to the customers of the newly acquired company and vice versa. Such a diversification strategy helps both the firm in the diversification of business, Synergy benefits, increasing customer base, and to achieve better economies of scale.
Example of Conglomerate Acquisition
The best example of a conglomerate, the merger is between Pay Pal and eBay. Around 2002, Pay Pal was not in a position to maintain its market repute. At that time, e-commerce giant acquired Pay pal just by paying around a billion dollars. However, presently eBay is having a market value of a hundred billion dollars. EBay had totally spanned off PayPal after its acquisition. As a result of the same, PayPal has revolutionized the payment system and challenged the traditional method of payment. These types of acquisitions are considered as a benchmark step for bringing the modern change in Silicon Valley.
This article has been a guide to Types of Acquisition. Here we discuss the top 4 types of acquisition, which include Horizontal Acquisition, Vertical Acquisition, Congeneric Acquisition, Conglomerate Acquisition, along with examples. You can learn more about financing from the following articles –