Types of mergers and acquisitions
Everyone knows the benefits M&A offers. However, knowing the types of M&A deals is crucial to getting the growth your business needs. Read on..
By teammarquee . February 7, 2023
Mergers and acquisitions may seem a long way down the line for a startup, but it’s essential to know how they can make their way into the firm’s long-term plan. While mergers and acquisitions are used interchangeably, they actually have two separate meanings.
Company mergers occur when two companies consolidate into a new entity with a new ownership and management structure.
Company acquisitions, on the other hand, do not create a new business entity. On the contrary, the small company ceases to exist and becomes part of the larger company.
Recent mergers and acquisitions have taken place because companies want to become more competitive in their industries. Through M&A deals, they have access to new customers, technology, or resources. Reduced competition in the market is a massive upside as well. This article will discuss the types of M&A deals an M&A consulting firm might use.
Acquisitions Based on the Relationship Between Buyer and Seller
Horizontal Acquisitions
Horizontal Acquisitions are when two companies in direct competition with each other sell the same products. This type of merger combines two companies that produce similar products or services and compete with each other.
The benefits of a horizontal merger include:
1. Market power
2. Cost savings
3. Improved competitiveness in the market
It’s worth noting that horizontal mergers may face regulatory complications, as governments tend to keep an eye on deals that lead closer to market monopoly.
Vertical Acquisitions
Vertical Acquisitions are between firms operating at different stages of production. For instance, a manufacturer acquiring a supplier or a distributor acquiring a retailer. The acquirer may be higher up or lower on the supply chain.
The benefits of vertical acquisitions include:
1. Improved control over the supply chain
2. New income sources
3. Low costs of production
Horizontal and vertical acquisitions are commonly found among recent M&A deals. The integration of Facebook, Whatsapp, Instagram & Messenger is a more recent M&A deal. Horizontal and vertical acquisitions are very popular and common types of deals.
Conglomerate Acquisitions
Conglomeration is another merger and acquisition type where two companies have no common business interests. The acquiring company may be looking to diversify its operations and enter new markets.
The benefits of this mergers and acquisition type include:
1. Diversification
2. Synergy
3. Tax incentives
Congeneric Acquisition
This is the process of acquiring a company or business that operates in the same industry or market as the acquiring company. This type of merger and acquisition strategy is used as a calculated move to expand the acquiring company’s market share, product offerings, or customer base.
The benefits of this M&A integration are:
1. Access to new customers
2. Product or service expansion
3. Access to new technologies or intellectual property
Reverse Acquisition
A reverse acquisition occurs when the legal parent or the legal acquirer is identified as the accounting acquiree, and accordingly, the legal acquiree is identified as the accounting acquirer.
Acquisitions Based on the Method of Acquisition: Statutory Transactions
Statutory transactions are transactions that are legally required/mandated by statute or regulation. For example; filing taxes, registering a business and obtaining licenses and permits. These transactions involve the submission of certain forms or documents to a government agency (or regulatory body) and are subject to explicit rules, deadlines, and penalties for non-compliance.
The advantages of Statutory Transactions are:
- Simplicity in documentation
- Compliance: Statutory transactions must comply with laws and regulations, certifying that they are carried out equitably and transparently.
Mergers
Mergers are defined as two companies consolidating into a new entity with a new ownership and management structure. The assets, business interests, and liabilities of all the entities are transferred to one.
Company mergers can also be classified as horizontal and vertical, or conglomerate. A horizontal merger is one where two companies in the same industry merge. A vertical merger is one where a company that supplies goods or services to another company merges with that company. A conglomerate merger is one where two companies from different industries merge. These are usually very complex and M&A consulting companies are hired to form merger and acquisition strategies and supervise these deals.
M&A consulting companies can be very helpful with documentation and providing advice when needed to the management.
Mergers offer an array of benefits such as; increased market share, economies of scale, and diversification of product or service offerings. However, there the negatives include; job losses, cultural clashes, and difficulties in integrating the two companies.
Triangular merger
These sorts of mergers have 3 parties involved:
1. The acquirer
2. The subsidiary
3. The entity to be acquired
The main advantage of entering into a triangular merger is that the acquiring entity can acquire the target without assuming its liabilities.
The two kinds of triangular mergers are: forward and reverse. In a forward triangular merger, the subsidiary survives and the target dissolves. Whereas in a reverse triangular merger, the target survives and the subsidiary dissolves. A firm might find this M&A integration strategy advantageous while considering their recent mergers and acquisitions pursuits.
Consolidation
Consolidation in M&A refers to the process of merging multiple companies or assets into one larger entity. Consolidation can be used to increase market share, reduce competition, and increase efficiency and profitability.
Share exchange refers to the process in which one company exchanges its shares for the shares of the other company.
Interest exchange refers to the process in which one company exchanges its debt or equity securities for the debt or equity securities of another company.
Acquisitions based on the method of acquisition: Non-Statutory Transactions
These methods include asset purchases and share or ownership interest purchases. They tend to provide more flexibility because they aren’t statutorily prescribed.
A share acquisition is when one company acquires all interest or a controlling interest in the stock of a corporation by directly buying the shares from the shareholders.
A share acquisition is when one company acquires all interest or a controlling interest in the stock of a corporation by directly buying the shares from the shareholders.
When an acquirer purchases the ownership interests of an LLC or another type of unincorporated business entity is generally referred to as an interest acquisition.
Asset Acquisition
An asset acquisition is when one business entity purchases all (or a lot of) the target’s assets, other than in the ordinary course of business. The target retains its separate existence after the transaction. The purchase price could be in cash, stock, other ownership interests, or further property.
Hybrid two-step acquisition
The acquirer first directly buys enough ownership interests to ensure voting control. After this, a merger takes place.
Conclusion
Mergers and Acquisitions are highly complex transactions, bringing their own unique challenges. The opportunities they open, however, are limitless. Getting the right amount of experience, insight and assistance by your side is indispensable. Our M&A services offer strategy and planning, valuation analysis, due diligence, and so much more. Call Marquee Equity at +1-213-600-7272 now.
We optimize & accelerate growth for already great products.
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