With businesses focused on expansion and increasing market presence, Mergers and Acquisitions (M&A) are a step in this direction and an equally rewarding process. But how do acquiring firms go about the M&A process?
Mergers and Acquisitions may seem easy, with two firms coming together, but there’s more to them than meets the eye. The process can be quite cumbersome, involving a lot of paperwork, legalities, and more.
Here, we will examine the different types of mergers and acquisitions.
Types of Mergers
1) Horizontal Merger
A horizontal merger denotes the union between two companies selling the same product or providing services to the same region, widening their reach.
This type of merger happens between immediate competitors and is common in industries with few companies, resulting in stiff competition. Therefore, mergers and their resultant benefits are major factors for merged companies in the existing industry.
Useful links: Mergers & Acquisition (M&A) Advisory – A Value Addition to Your Business
2) Vertical Merger
When two companies offering different products for the same service merge, it is termed a vertical merger.
This type of merger mostly occurs between two companies within a particular industry’s production or distribution process. The purpose behind this kind of merger is to achieve high-quality control and gain more command over the supply chain, giving the merged firms a better competitive edge in the industry.
3) Concentric Merger
Similar to horizontal mergers, concentric mergers occur when one company merges with another to sell products to the same customer, even though the companies sell different products.
4) Conglomerate Merger
A conglomerate merger happens between two unrelated companies. Conglomerate mergers are of two types:
- Pure Conglomerate Merger happens between companies selling completely unrelated products and who are operating in different markets
- Mixed Conglomerate occurs between companies to expand product lines or target markets
Useful links: M&A Strategy for SMBs Turns a Burgeoning Trend
Conglomerate mergers can be risky as they result in an immediate shift in business operations. This will be difficult for employees of both companies as they have operated in different markets and offered unrelated products or services.
Types of Acquisitions
Acquisition is a process in which an acquiring firm purchases a company to absorb the purchased company into its business. There is no exchange of shares, and no new company is created.
1) Traditional Acquisition
A formal acquisition involves purchasing a company through the purchase of its shares or assets. It is a great way to expand your business, but it entails certain disadvantages.
If an acquiring company buys a firm through the purchase of shares, it also acquires the liability of the target company. This can add to the acquirer’s burdens, as it may have invested in a large loan to fund the acquisition.
As in the case of mergers, there’s also a matter of concern with corporate culture in acquisitions. Although the acquired firm is absorbed into the acquirer’s business operations, the buying-out company’s employees are retained. Suppose the acquiring firm fails to ensure that all employees work harmoniously and are accustomed to the new environment. In that case, it will negatively impact employee performance and lead to a downward spiral in terms of productivity. This can challenge firms who have expanded their business to enhance service delivery.
2) Reverse Merger
A reverse merger occurs when a private company acquires a public company to attain publicly-listed status. It’s quicker to attain public firm status through reverse merger.
Reverse mergers allow businesses to grow and reach new markets, increasing their profitability and credibility.
However, its disadvantage lies in the same area as its advantage. The reverse merger is the most risky way to go public. If employees don’t have prior experience working in public companies, they will not be prepared for the extensive and expensive compliance requirements of being a publicly traded company.
Firms involved in a reverse merger must maintain enough funds to continue operations even after the merger and gain adequate knowledge of regulatory requirements.
Useful Link: Redefining Business Success With IT M&A Advisory Services
Differences Between Mergers and Acquisitions
While most people believe that mergers and acquisitions are the same, there are several differences between the two:
| Mergers | Acquisitions |
| Merger refers to a collaboration of two companies to form a new entity | Acquisition refers to a process where the acquirer gets hold of a significant stake in the target company and continues to operate as an individual entity |
| Similar companies are merged | Large companies purchase small ones |
| The two companies combine to increase their strength and financial profits and eliminate trade barriers. | Firms of two different sizes collaborate to counter the challenges of a decline in business. |
| A buyout agreement occurs when the acquiring and target firms agree on a merger. | A buyout agreement happens when the acquiring firm wants to buy the target, and the buyout firm is not willing to be bought. |
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Mergers and Acquisitions (M&A) – Reasons
Mergers and Acquisitions are very essential as they increase market share and give a competitive edge for merged companies by way of:
- Reduced redundant operational costs
- Boosted production capacity
- Increasing growth prospects
- Improved existing skills and technology
Companies adopt various M&A strategies based on geographic locations, financial needs, and business objectives. Thanks to the benefits of mergers and acquisitions, most companies invest their energies in pooling their talents and assets. Whether a horizontal merger or a traditional acquisition, planning a strategy requires much attention and effort, that’s why Veritis has M&A process guidance and advisory services in its arsenal.
Key Takeaways:
- Mergers and acquisitions are a key part of business
- It demands an eye for detail and precise knowledge of how and what the formative decision will bring on
- It is important to have an advisor, such as Veritis, at hand as an objective eye will spot aspects that are not immediately visible to the parties involved
What is your business growth strategy? Are you looking for mergers and acquisitions consulting? Contact Veritis!
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