To fully reap the benefits of mergers and acquisitions (M&A), it is necessary to successfully navigate the complex M&A process. A robust strategy is fundamental to this success, and a significant aspect of that strategy is the type of deal. The M&A transaction selected affects various aspects of the strategy, just as the strategy and goals influence the transaction type. Thus, understanding the different types of mergers and acquisitions is essential. To facilitate this, we’ve compiled a list of different M&A types:
- Horizontal
- Vertical
- Conglomerate
- Congeneric
- Market extension
- Product extension
- Reverse takeover (SPAC)
- Acqui-hire
- Tender offer
- Triangular merger
- Statutory
- Consolidation
- Subsidiary
There are various approaches to differentiate mergers and acquisitions into types. One such method is to consider the relationship between the companies involved and the strategic rationale behind the deal. These types include:
Horizontal
A horizontal merger occurs when two or more companies operating in the same market or industry and offering similar products and services join forces. These companies are often competitors, and through this type of integration, they aim to leverage the synergies created and achieve a greater market share.
Example of horizontal M&A
One prominent example of a successful horizontal merger is the union of Glaxo Wellcome and SmithKline Beecham. In 2000, these two largest pharmaceutical companies in the UK merged to establish GlaxoSmithKline, which has since become one of the world's largest pharmaceutical firms.
A recent example of horizontal M&A is the acquisition of LXI Reit Plc by Londonmetric Property Plc. Both the companies operated in the UK real estate market and completed their merger in the first quarter of 2024.
Vertical
A vertical merger or acquisition occurs between two companies operating in the same industry, but they are typically not direct competitors. Instead, the acquired company operates at a different level of the production or supply chain. These deals are typically sought to enhance supply chain efficiency, refine operations, and achieve greater control over production and distribution processes. An example includes a manufacturer acquiring one of its essential raw material suppliers.
Example of vertical M&A
Apple's $1 billion purchase of Intel's smartphone modem business is a noteworthy instance. Apple's goal was to cut reliance on third-party suppliers and components through this acquisition. Intel, a key supplier of modems to Apple before the deal, had its operations integrated into Apple's supply chain, allowing for in-house modem production. This acquisition stands as a textbook example of vertical M&A, providing Apple with about 2,200 experienced employees, equipment assets, leases, intellectual property, and a portfolio of over 17,000 wireless technology patents.
Conglomerate
A conglomerate merger or acquisition occurs when the involved companies are from distinctly different industries with no connections. This approach is frequently adopted by major conglomerates to buy businesses in various fields, aiding them in diversifying both their portfolio and revenue streams.
Example of conglomerate M&A
An illustrative case of a conglomerate merger is Google’s $3.2 billion acquisition of Nest in 2014. Nest Labs was in the smart-home devices arena, and its acquisition allowed Google to extend its reach beyond its core search and advertising focus into the Internet of Things (IoT) market.
Congeneric
A congeneric M&A involves companies from the same industry targeting a similar customer segment but differing in their product or service offerings. These businesses are not in direct competition but usually offer complementary products or services. This is well illustrated in the case where a bank acquires an insurance firm. Both operate within the financial services industry but provide separate services. This type of acquisition allows the acquirer to diversify its offerings and take advantage of cross-selling opportunities.
Example of congeneric M&A
A notable example is the acquisition of Bear Stearns, an investment bank, by JPMorgan Chase, a large commercial bank. Another instance is Walmart acquiring Jet.com. Although both companies are in retail, Walmart operates through physical stores, whereas Jet.com was an e-commerce platform. To boost its online presence, Walmart bought Jet.com for its digital expertise and technology. Jet.com has since been absorbed, with its technology and talent integrated into Walmart’s online operations.
Some types are determined by the purpose behind the transactions, such as:
Market extension
A market extension M&A occurs when two companies that offer similar products and services in different geographic regions come together to access new markets. This strategy is geared towards entering new markets and hence frequently observed in cross-border M&A.
Example of market extension M&A
Amazon acquired Souq.com, a key online retailer in the Middle East. Aimed at expanding Amazon's presence in the Middle East, this deal illustrates market extension M&A. Likewise, US-based Blink Charging acquired EB Charging from the UK to enter the UK market.
Product extension
Product extension mergers involve firms in the same sector offering different products or services. The objective is to widen their product or service portfolios, facilitate cross-selling, and utilise synergies, keeping the same market focus. Such M&As are sometimes referred to as concentric mergers.
Example of product extension M&A
A classic example is the 2015 Heinz-Kraft merger creating the Kraft Heinz Company. Both entities operated in the food sector, with Heinz specialising in condiments and sauces, and Kraft in processed foods and snacks.
Reverse takeover (SPAC)
A reverse takeover, or Special Purpose Acquisition Company (SPAC) deal, is a unique type of M&A transaction in which a private company acquires a publicly listed company, thereby becoming a publicly listed company itself without undergoing the costly and complex IPO process. In some cases, the public company may acquire the private one instead, but the ultimate goal remains for the private company to be publicly listed and take control of the newly merged entity.
Example of reverse takeover (SPAC) M&A
Virgin Galactic, a spaceflight company, became publicly listed through a SPAC merger in 2019. A similar path was taken by Opendoor Labs Inc., a real-estate tech company, to go public in 2020.
Acqui-hire
Although companies may not always openly admit it, this type of M&A is driven by the goal of acquiring the highly skilled talent within the target company rather than the business itself. This strategy is especially common in the tech sector, where giants like Google and Meta are known to acqui-hire smaller startups for their valuable talent.
Example of acqui-hire M&A
A very recent instance is Microsoft’s deal with Inflection AI, which involved hiring its employees, including co-founders Mustafa Suleyman and Karén Simonyan, and licensing its AI software. As part of the deal, Microsoft paid $650 million to Inflection AI.
M&A deals can be categorised based on the execution method of the deal; these include:
Tender offer
A tender offer is a type of M&A transaction in which the acquiring company makes a public offer directly to the shareholders of the target company to purchase some or all of their shares at a specified price, typically higher than the current market price.
Example of tender offer M&A
The acquisition of LinkedIn by Microsoft in 2016 is considered one of the largest tender offer deals in the tech sector. The valuation of this M&A deal was $26.2 billion, with Microsoft offering a significantly higher price than LinkedIn's prevailing market value at the time to its shareholders.
Triangular merger
A triangular merger involves three parties, which are the parent company as the acquirer, the subsidiary of the parent company, and the target company. In this type of transaction, the target company first merges with the subsidiary of the parent company and ultimately becomes a subsidiary of the parent company.
Triangular mergers come in two forms. The first is the triangular merger, also known as an indirect acquisition. In this arrangement, the target company dissolves and integrates into a subsidiary.
The second type is the reverse triangular merger, in which the parent's subsidiary dissolves, allowing the acquired target to continue functioning as a subsidiary. In this arrangement, the parent company establishes a shell company or subsidiary specifically to acquire the target.
Example of triangular M&A
Walmart created a subsidiary to buy Yihaodian, an online retailer in China. This deal exemplifies a forward triangular merger.
The reverse triangular merger strategy was used in Amazon's acquisition of One Medical, in which Amazon established a shell company that was absorbed by One Medical, thus making One Medical a subsidiary of Amazon.
M&A types based on the structure and outcome of the combination are:
Statutory
Statutory M&A occurs when a larger company acquires a smaller target company, leading to the target's dissolution while the larger company continues to operate with the acquired assets and liabilities.
Example of statutory M&A
Johnson & Johnson acquired Actelion Ltd through a statutory merger in 2017, resulting in the dissolution of Actelion Ltd and the transfer of its assets and liabilities to Johnson & Johnson.
Consolidation
This type of M&A involves two or more companies coming together to establish a new legal entity, with the original companies ceasing to exist.
Example of consolidation M&A
Exxon and Mobil, two distinct oil companies, consolidated through a merger in 1998. After the merger, both Exxon and Mobil ceased to exist separately and formed a new legal entity, ExxonMobil.
Subsidiary
In this type, the target continues to operate its business while becoming a subsidiary of the acquirer.
Example of subsidiary M&A
A well-known example is Google's acquisition of YouTube in 2006, which resulted in YouTube becoming a subsidiary that continues to operate under Google.
Make the right choice
Choosing the right type of transaction in an M&A depends on various factors, including motivations, desired outcomes, and deal structure. The purpose behind a deal largely determines the type and strategy to be used. Understanding and defining the type of merger or acquisition is just the initial step in the strategy development phase, marking the beginning of the complex M&A process.
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