Oct 30 5 Major Types Of Business Mergers And Acquisitions (M&A)
Mergers and acquisitions are some of the most dynamic steps in business growth and expansion. Although they are executed differently, both mergers and acquisitions involve lots of complex legal and financial procedures and activities. M&A undertakings necessitate protracted consultations with qualified accounting firms, such as those offering Clifton NJ business advisory services, and business valuation services, to avoid legal and financial quagmires when closing the deal.
Basically, a merger occurs when two or more business entities join together to create one large business operation with similar business interests and operational goals and objectives. On the other hand, an acquisition occurs when one firm buys out another firm by acquiring more than half of the latter’s equity in order to control the overall operation of the purchased business entity.
Inherently, the two types of business unions are undertaken with the aim of optimizing profitability by enhancing various strategic business competencies. And speaking of competencies, M&A enables companies to eliminate supply surplus in an industry, acquire superior human resources and technology at a cheaper and faster rate, reduce competition, expand market reach and supplier network, nurture and improve promising business ventures early, and to boost revenue flow. All these financially oriented benefits result from any of the following types of mergers and acquisitions.
This is where two companies serving the same client base with similar products in the same field/industry join together to form one big company. The main reason for this type of union is to create monopolies and hence control the market, to reduce competition and market risk, and to create economies of scale in business operations. The merging firms combine all their resources to create a formidable production and marketing force capable of producing a wide range of products for a huge market. A good example of a horizontal merger in the real world is when the Bank of America merged with Merrill Lynch or the acquisition of Warner-Lambert pharmaceutical company by Pfizer and so on.
Vertical business mergers happen in two main setups all within the value chain. The first setup involves the union between a company and one of its strategic suppliers. A good example is when a laptop or smartphone manufacturer acquires a microchip manufacturer. The other vertical integration scenario involves the merging of a firm with one of its product resellers or distributors. In this case the firm wants to connect with its customers directly. Picture a chemicals manufacturer buying one of its national or global product distributors. Examples of vertical mergers include the recent Amazon purchase of Whole Foods Market and the acquisition of Beats Electronics by Apple.
Conglomerate mergers or conglomeration involve the acquisition of one company by another firm from a partially or totally different industry. There are two types of conglomerate mergers, namely pure and mixed mergers. Pure conglomerations involve two entirely different firms while mixed mergers feature two partly related companies seeking product or market extensions. A real world example of a pure conglomerate merger happened between Oculus VR and Facebook and a mixed merger occurred when Microsoft acquired the social networking site Yammer.
This is where two or more companies with common characteristics are integrated into one diversified or consolidated firm. The merging companies can have similar customer or target market groups, production functions/processes, and/or operational technology. A good real life example is the eBay merger with Craigslist or the buyout of Gillette by Procter & Gamble.
Forward And Reverse Mergers
In forward mergers, the target firm is absorbed by the acquiring or buying company whereas in the reverse merger the opposite happens; the buyer is taken over by the target. Reverse mergers are usually used by private companies to acquire publicly traded companies and hence create a public firm without an IPO. Shareholders of the buyer are usually compensated with stock in the target company. The acquisition and absorption of Wachovia by Wells Fargo is a real life example of a forward merger. And a real instance of a reverse acquisition is the Atari and JT Storage merger.