Types of Mergers and Acquisitions

There are several types of transactions that are commonly referred to as a merger or an acquisition (M&A). A merger usually describes two firms that unite their ownership to operate as a new entity. In an acquisition, one company takes over another, establishing itself as the new owner.

Acquisitions

In an acquisition, the acquiring company purchases a majority stake in the target firm, which keeps its name and its organizational structure. Types of acquisitions include:

Tender Offers – A tender offer is typically an active and widespread solicitation by a company or third party to purchase a substantial percentage of a target company’s securities. The acquiring company bypasses the management and board of directors to make its offer directly to the target company’s shareholders.

Acquisition of Assets – In an acquisition of assets, one company directly acquires the assets of another firm. The target company must obtain approval from its shareholders before its assets can be acquired. The purchase of assets typically occurs during bankruptcy proceedings.

Management Buyout – In a management buyout (MBO), a corporate manager or team purchases a controlling stake in a company from a private owner and/or any shareholders in the company, who must approve the transaction. The executives often partner with a financier or former corporate officers to help fund the acquisition. MBOs often occur when the managers feel they are better equipped to help the company grow and succeed financially.

Mergers

In a merger, the boards of directors of two companies approve the merger and work to gain shareholder approval. There are several ways in which mergers can be structured, including:

Horizontal merger – The purpose of a horizontal merger is to increase market share through consolidation. Both companies operate in the same space, offering similar products or services. With the increased size of the new company, it should be better positioned to compete. A horizontal merger creates value if it increases economies of scale in the market(s) in which the company operates.

Market-extension and product-extension mergers – A market-extension merger is similar to a horizontal acquisition—the companies involved are similar, yet located in different geographical markets. In a product-extension merger, the two companies sell different but related products in the same market.

Vertical merger – In a vertical merger, one company acquires another at a different level of a production or value chain. When a company focusing on one area of a production or value chain acquires another company focused on a different part of a production or value chain, then the acquisition is described as being vertical.

Concentric merger – A concentric merger (also termed a ‘congeneric merger’) is a variant of a horizontal acquisition. Rather than having similar products or service lines, the two companies have different product lines and services, even if they broadly serve the same market. The overlap of products or services creates revenue synergies through significant cross-selling opportunities for both companies.

Conglomeration – A conglomerate acquisition occurs when managers grow a company through a series of acquisitions that result in a diverse and unrelated range of product and service lines across geographies and industries. Think GE under Jack Welch or Proctor & Gamble.

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