7 Types of Mergers and Acquisitions with Examples

7 Types of Mergers and Acquisitions with Examples

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When a company is deciding on an M&A strategy, the type of acquisition it is looking to make will often determine the strategy even before a long list of potential targets is developed.

DealRoom has worked with companies on every manner of the deal, so we decided to provide readers with a brief overview of different acquisition types, along with an indicative example.

So, what are the most common types of mergers and acquisitions?

1. Horizontal Acquisition

1. Horizontal acquisitions (often called ‘horizontal mergers’)

This involves gaining market share through consolidation.

Both companies should be operating in the same space, providing more or less the same products and services. The increased scale of the new company should give it increased bargaining power and a better competitive position than the two companies previously had when they were on their own.

In most industries, the largest players either obtained or maintained their leadership position through horizontal acquisitions.

Example: The $81 billion acquisition of Mobil by Exxon in 1998.

2. Market Extension Acquisition

A market extension acquisition is a variation of a horizontal acquisition, whereby the companies in question are in different geographic locations.

Ultimately, the aim is still consolidation, but within a wider geography. Cross-border acquisitions are the most commonly seen form of the market extension acquisition, and are particularly common in industries like food retail and retail banking.

In these industries, the typically high levels of consolidation that exist incentivize new companies entering the market to undertake acquisitions rather than starting greenfield operations in the new geography.

Example: Acquisition in 2002 of the American-based Eagle Bancshares Inc by the subsidiary of Royal Bank of Canada, RBC Centura Inc.

3. Vertical Acquisition

If a horizontal acquisition describes a company buying a competitor operating on the same level of the production chain, a vertical acquisition describes what happens when one company acquires another at a different level of the production or value chain.

If we think of Michael Porter’s value chain diagram, the primary activities are listed (see below, from left to right) as: inbound logistics, operations, outbound logistics, marketing and sales, and services.

A vertical acquisition occurs when a company focusing on any one of these areas acquires another with a focus on one of the others.

Example: IKEA’s acquisition of Romanian Baltic Forests in 2015.

4. Conglomerate Acquisition

Our consumption patterns increasingly revolve around conglomerates, who have become experts in acquisitions.

The conglomerate acquisition occurs when a large company has grown through a series of bolt-on acquisitions, usually with a diverse range of product and service lines, geographies, and industry outlooks.

Everybody is familiar with the names of the world’s largest consumer product conglomerates such as Proctor & Gamble, Nestle, GlaxoSmithKline, and others. When we think of their product lines, they can include anything from pet food to detergent, dairy products to frozen foods.

Example: Proctor & Gamble’s $57 billion acquisition of Gillette in 2005.

5. Congeneric Acquisition

A congeneric acquisition (also referred to as a ‘concentric acquisition’) is a twist on the horizontal acquisition, where, rather than having the same products or service lines, the two companies involved in the deal have different product lines and services, even if they broadly serve the same market.

This overlap between the companies creates synergies (whereby the two companies become greater than the sum of their parts).

A typical example usually given by corporate finance textbooks which exhibits this distinction in a simple fashion is an ice-cream manufacturer buying a wafer manufacturer.

Example: Morgan Stanley’s $13 billion acquisition of E*Trade in 2020.

6. Reverse Takeover (SPAC)

Reverse takeovers or ´SPAC´(Special Purpose Acquisition Company) deals have spiked over the past five years.

In this form of acquisition, a private company acquires a public company with the intention of using it to go public, and avoid the usually costly IPO process. Depending on how the deal is structured, a reverse takeover can also involve the public company acquiring the private company.

However, the ultimate aim is always for the private company to take control of the newly merged company and for it to be publicly listed. 

Example: The acquisition of US Airways by America West in 2015.

7. Acqui-hire

At a time when the biggest companies in the world are defined as much by their talent and intellectual property as their capital assets, the acquire form of acquisition is a proven way for companies to ensure that they’re winning the talent race in their industry.

This is most commonly seen in the technology sector, where a shortage of programmers at the very highest levels means that the big tech companies will do almost anything to get their hands on value-adding talent, including buying their company.

Example: Facebook’s acquisition of Drop.io in 2010, with the explicit goal of bringing Drop.io CEO Sam Lessin onto the Facebook roster.

Conclusion

In the most basic terms, an acquisition is simply a transaction wherein one company buys another company. But as this article shows, that transaction can have many different forms and underlying motivations.

Understanding these will enable you to think about whether your M&A strategy adequately addresses your company’s long-term goals.

Talk to us at DealRoom about how we can help you in this process.