Types of Acquisition
Mergers and Acquisitions are considered key for growth in the market in a short span of time in today’s corporate world. The standalone entity that can achieve in the period of a few years can be achieved even in one or two years, just by acquiring the entity or merging its own entity with the better entity. The following acquisition types provide an outline of the most common acquisitions. Each type of acquisition states the topic, the relevant reasons, and additional comments as needed.
The top 4 acquisition types are as follows –
- Horizontal Acquisition
- Vertical Acquisition
- Congeneric Acquisition
- Conglomerate Acquisition
Let us discuss these in detail –
#1 – Horizontal Acquisition Type
In the market, the biggest factor that is 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 and try to maximize its share in the market. In the market, 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. This 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 own brand name. This will help in penetrating the market 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. This allows them to cover the uncovered area and try to make their presence feel across the globe.
#2 – Vertical Acquisition Type
To have all the activity related to any business gives synergy benefit to any entity. A vertical acquisition can be done by either backward integration or forward integration. 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. This will help in obtaining the inventories at highly reasonable rates. If the same wholesaler acquires retail stores, it will be considered as forwarding integration. This 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 own manufacturing unit, own 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 Type
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. This 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, satisfy the single need of the customer. It helps 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 it to provide 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 acquire 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 line, different geographies, and different customer base and has a completely different business model. This 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 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. PayPal had been totally spanned off by eBay after its acquisition and 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.
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.
This 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 examples. You can learn more about financing from the following articles –