The 21 Types of Mergers and Acquistions

In short:

• There are multiple M&A methods available depending on your situation and aims
• M&A provides an effective means of growing market share
• Other reasons to merge include the securing of skilled staff and making the company public

 

At its core, the idea behind mergers and acquisitions is simple. Businesses either purchase another company and absorb it into part of its own operations, or join forces to become a stronger market power. That being said, there are a multitude of different types of M&As that you may hear about.

We’ve compiled a comprehensive guide to all of the M&A categories we’ve encountered to demonstrate the variety of different approaches an investor can take. Which will suit you will depend on your current situation and the sector you operate in.

 

 

Horizontal merger or acquisition

Two businesses within the same sector combine to create a larger market force. Not only does this widen the market share of the companies involved, but it also removes a competitor as it’s absorbed into the other.

This is one of the most effective growth strategies available to many businesses and there’s been multiple high-profile examples over the years.

Some examples:

Banking giants, Lloyds and TSB merged to become Lloyds TSB, which in turn, absorbed the struggling HBOS in 2019. The acquisition of HBOS had the effect of increasing Lloyds TSB’s market value to £16.4bn.

Glaxo Wellcome and SmithKline Beecham’s combined might created GlaxoSmithKline in 2000.

The 2025 merger between Vodafone and Three will provide better network coverage for users and will become the UK’s largest mobile platform as a result.

 

Vertical merger or acquisition

Instead of moving sideways to absorb a similar company to your own, vertical M&As see companies look up and down their supply chain to look for opportunities.

M&A expert and founder of Forbes Burton, Rick Smith, explains that this can be a sound money-saving strategy in the long run. “If your business is dependent on the suppliers it buys from, it can inadvertently be overexposed to some risks” he says.

“Should your supplier raise its prices or even fold, you can find that your own business suffers as a consequence. By purchasing that same company, we’ve seen companies not only remove that risk, but even move to make things difficult for competitors that used them too.”

Conversely, by acquiring companies further up the supply chain, businesses can reap the rewards that they usually help others to achieve. Ultimately, by having control over as many aspects of the supply chain as possible, companies are able to save and create more money while avoiding many external disruptions. It’s a great option for those that would like to gain more control of their supply chain or increase its efficiency.

An example of a vertical acquisition is Netflix’s purchase of Animal Logic, Scanline VFX and other TV production companies. By making their own content, they save money on purchasing from other production companies and networks.

 

Conglomerate mergers and acquisition

This is the merger of two companies that belong to unrelated sectors.

This provides opportunity for businesses to diversify their offerings and thus avoid being overexposed to risk. For example, if a company is only focused on producing scotch eggs for the US market, they can quickly find themselves in trouble if a new study finds scotch eggs toxic or if a political embargo is placed on the US.

While these scenarios may seem far-fetched, they merely serve as examples of how external forces can scupper a business that only has one function to fall back on. We saw several clients that were hit hard by trading embargoes placed on Russia after the invasion of Ukraine. Smith explains that one birdseed company “collapsed overnight after placing all of their efforts in exporting to Russia”.

By having another arm of the business in an unrelated field, companies avoid ‘putting all their eggs in one basket’ and can fall back on something else in the event of an unforeseen circumstance occurring. It also provides scope for branching into new areas in the future.

Examples of conglomerate deals include Amazon’s purchase of Whole Foods, a grocery chain. While Amazon had already done a good job of diversifying at this stage (it started as just an online bookstore), this deal allows them to both look at eventually moving their services into bricks and mortar premises, and selling groceries through their existing setup.

 

Conglomeration

There’s a blurring between this and a conglomerate merger, and both terms may be used interchangeably. Rather than the examples above, however, this refers to large, conglomerate holding companies that have several businesses under its umbrella.

It works in the same way, in that if holding company owns a large entertainment firm that struggles, it is still propped up by the rest of its portfolio that spans different industries. These conglomerates usually take more of a back seat in the everyday running of the companies it owns, with them each operating as standalone businesses.

One of the best-known conglomerates in the UK is Proctor and Gamble. Like most conglomerates, they focus on a loose category that they specialise in. For P&G, this is hygiene and cleaning. Their portfolio includes huge names such as Fairy, Gillette, Braun, Pampers and Pantene.

Interestingly, while UK consumers may feel they have a choice between Ariel, Bold and Daz when it comes to washing powder, all three are actually owned by P&G.

 

Congeneric/concentric merger

Congeneric mergers refer to the combination of two businesses in the same industry that offers a different product and so isn’t a competitor. This is usually done with the intention of expanding product offerings in some way.

This often has the effect of an enhanced synergy, with the new, combined business working better together than before.

A congeneric merger can bolster a company by improving its user experience and streamlining operations as to save money and time.

As an example of this, eBay’s acquisition of PayPal made the payment process a lot smoother at the time, and Google’s purchase of YouTube added an extra dimension to its search experience.

 

Market extension merger/acquisition

If you can’t grab a bigger slice of your market, another option is to make the market that’s available to you larger.

This can be accomplished by moving into different territories and can be especially effective if you find an area with little competition.

For large companies, this often means looking overseas for new opportunities. SMEs can utilise the same technique though, with those operating in one town branching out to others.

While this can be done by simply opening a new branch elsewhere, it’s often easier to buy out a similar company in the chosen area.  M&A expert, Rick Smith explains that “doing this allows you to absorb the target company’s client base straight away and provides you with a ready-made presence in that area.

“Solicitors, estate agencies and accountancy practices are often good at using this growth strategy, and many people will be able to spot local businesses that have several offices across nearby towns and cities.”

 

 

Product extension merger/acquisition

Similar to a congeneric merger, product extension deals occur between businesses in the same sector that sell different things. For example, a manufacturer that produces football boots might be interested in acquiring a shinpad manufacturer.

Product extension deals serve to create an extra revenue stream for businesses and fortify their product offerings. This can solidify their reputation as a major player in a particular industry, and provide multiple cross-selling opportunities.

 

Reverse merger/SPAC

A SPAC (special purpose acquisition company) is a company that doesn’t trade at all, but is rather set up with the sole intention to raise enough funds to eventually, acquire or merge with another business.

SPACs raise capital via initial public offerings (IPOs) and then use those funds to find and then acquire target companies. Being bought by or merged with a SPAC can be an attractive proposition for the target business. A traditional IPO can take well over a year to prepare and execute, but by being absorbed into a company that has already done this, the acquired business effectively fast-tracks its way into going public.

There are a couple of drawbacks for the owners of the SPAC, however, with the main issues coming from regulatory bodies. SPACs have come under increased scrutiny over recent years and have a limited amount of time in which to complete an acquisition. Selling shares in the IPO can occasionally be difficult too, as it is basically a ‘shell’ company with no clear acquisition target, making it an unknown investment.

 

Acqui-hire

Acqui-hire is an interesting type of merger or acquisition in so much that it isn’t directly fuelled by commercial desires or increased market share.

Instead, an acqui-hire is an alternative means of hiring staff. Some industries can struggle to find suitably skilled staff, with certain sectors facing a particular shortage.

In these cases, an acqui-hire can often be the easiest way to source new talent. If the new workers have skills that your current workforce doesn’t, you may be able to branch out with your service or product offerings. On the flip-side, it may be that you’re hoovering up the best of the best, or simply the select few that are available. This can weaken competitors’ future hiring efforts.

Acqui-hires are popular within the tech industry and have the benefit of providing companies with skills they might otherwise have to wait for their current staff to be trained up in.

 

Hostile takeover/tender offer

Given the name, it should be of little surprise to learn that a hostile takeover is a highly controversial method of acquiring a company.

Should the management team of a target company reject being bought out, the purchasing company can circumnavigate this by going direct to the target’s shareholders instead. They then offer premium prices to buy the shares from them in an attempt to gather a large enough percentage to be able to usurp the management.

Although perfectly legal, it remains a controversial practice that has the potential to sour a brand image, both in the business world and for customers. Past high-profile deals have even led to reforms in M&A law after contentious acquisitions have drawn negative media coverage.

One of the biggest hostile takeovers in the UK was that of American giant, Kraft, buying out Cadbury in 2010. At the time, Cadbury was already the world’s second-largest chocolate manufacturer and had no intention of selling to an international rival. The US juggernaut succeeded in its hostile takeover, however, and proceeded to make sweeping job cuts and factory closures across the UK.

As a result of this, changes were made to how much detail of the acquiring party’s plans are made public, as well as anonymity laws.

Other high-profile examples include Vodafone’s hostile takeover of Mannesmann in 1999, which drew ire from many quarters in Mannesmann’s native Germany, while Pfizer’s failed attempt to swallow up AstraZeneca in 2014 showed that this method doesn’t always work out.

 

 

Triangular merger

Triangular mergers are far more straightforward than its name suggests. They simply involve the acquiring business using a subsidiary to merge with the target company instead of themselves.

The parent company isn’t directly involved in the process at all and retains control of its subsidiary after the merger is complete.

 

Reverse triangular merger

This simply refers to a triangular merger in which the target company swallows up the parent company’s subsidiary instead of the other way around.

In triangular mergers, the parent company’s subsidiary will still remain after the deal, having absorbed the target business. The reverse triangular merger sees the target company remain after absorbing the subsidiary instead.

In a clear reverse triangular merger, Amazon created a subsidiary shell company with the sole intention of merging with One Medical, a primary care business. Once the merger was completed, the shell company was absorbed into One Medical, and One Medical continued trading as a subsidiary of Amazon.

 

Statutory merger

You may come across the term ‘statutory merger’ from time to time, but this is more of an American term. It refers to two companies merging, but the target company being absorbed into the acquirer, rather than surviving as a subsidiary.

This is done through an automatic dissolution of the target company upon deal completion. There is no direct UK equivalent of this, as we rely on court-sanctioned processes to sort out the transfer of assets and liabilities instead.

 

Share-for-share exchange

In share-for-share exchanges, the shareholders of the target company have their shares bought from them and replaced with those of the acquirer.

These new shares effectively take the place of those that have been sold and are treated as if they were the same. Even the original cost and date of acquisition of the old shares are carried over to the new shares.

 

Consolidation/amalgamation

Two or more companies combine with one another to create a much larger single company.

There are several benefits to this. Beyond the usual advantages of increased market share, and the access to extra skills and talent, consolidation can help to cut costs. This is because larger firms are able to secure much better deals with suppliers and other companies.

The acquiring company’s suppliers could see a significant increase in demand as a result of the consolidation, and be receptive to offering better rates in order to keep hold of such a large client.

 

Share acquisition

Rather than an extra ‘type’ of acquisition, this is instead the norm for most acquisition types.

When most businesses are bought, they are bought as a share acquisition. If a company is offered £500k to be bought out, it is in fact offering £500k for the shares in the company.

This differs from a hostile takeover in the fact that the target company has agreed to the sale, and the shares can be bought directly from them.

Bought this way, the buyer assumes full control of the business and assumes all of its liabilities too.

Share acquisitions are one of two options available in a business purchase.

 

Asset purchase

The other option available to investors is to make an asset purchase.

In this scenario, the buyer decides not to buy the entire company and instead just buys the company’s assets.

There is no adoption of any liabilities, or any business owned afterwards, the buyer simply chooses which assets it would like and purchases those.

Buyers may choose to buy all of the company’s assets or just one or two. There can even be multiple buyers purchasing several different assets.

Generally speaking, after the assets have been sold, the selling company usually dissolves.

 

Reverse merger

Similar to a SPAC, the focus of a reverse merger is on becoming listed on the stock market. Unlike a SPAC, however, a reverse merger negates the need to go through the lengthy process of an IPO.

Here, the buying company acquires the public target business and becomes a publicly listed company in the process. Smith explains that “reverse mergers practically make a ‘shell’ company out of the target business instead of themselves”.

It’s a great option for firms that would like to be floated on the stock market without having to go through the time and effort involved in putting together an IPO.

 

Leveraged buyout

A leveraged buyout uses borrowed money to purchase the target business. Often, the money is raised against the value of the target company’s assets, with them being used as collateral in order to secure loans.

The attraction of a leveraged buyout for the buyer is obvious: it allows them to complete large business takeovers without committing a great deal of their capital. They can, however, be viewed in a negative light occasionally as an exploitative takeover method owing to the target company’s assets being used as collateral for another’s loan.

Despite several high-profile examples of successful leveraged buyouts, the practice isn’t without its risks. In 2007, Goldman Sachs and other investors acquired energy provider, TXU. The majority of the deal was made up of borrowed funds, creating a debt that they confident would be serviced by a strong cash flow from their acquisition.

Unfortunately for them, there was a global financial crisis just around the corner as well as a drop in natural gas prices. This led to TXU defaulting on its interest payments and eventually going bust.

 

Management acquisition

Seen more among SMEs than large corporations, a management acquisition is simply a case of a company’s management team buying out its owners.

The outgoing owners may be looking to sell for a number of reasons, but management acquisitions are perhaps most commonly implemented when business owners are planning to retire.

Smith describes management acquisitions as “a popular option that can make sense for all parties involved.

“Management acquisitions allow business owners to effectively ‘groom’ their successor and relax in the knowledge that the business is being left in good hands. For the incoming owners meanwhile, there are few better purchases than a business they already know inside out. This can help to avoid any nasty surprises occurring once the deal is concluded. What’s more, the business can almost enjoy a seamless transition, with the minimum of disruption to operations or staff.”

 

 

Speculative acquisition

Rather than any particular method of acquisition, this refers more to the motivation behind the purchase.

While many will be looking at financial records to confirm that their target company is a viable potential acquisition, those looking at speculative acquisitions are focused more on potential.

This can take many forms, but if you notice a large firm acquiring a virtually unknown company in a niche field, it can often be because the enquirer is anticipating a change that will see that company suddenly grow soon. This could be an upcoming legal or political reform that might benefit the company or an easily remedied mistake that acquirers think is keeping a failing company from succeeding.

 

Wondering which is the best route for you to take?

We’ve helped thousands of businesses to identify the best way forward for them. If you’re considering an acquisition or merger, we can provide specialist advice on the best method for your particular business to use.

No two businesses are the same. That’s why we deliver practical solutions that are tailored specifically for your business and the specific outcome you want to achieve.

Speak to one of our friendly M&A experts to find out how we can help. Our initial consultations are completely free and without obligation.

Whether its advice on which route makes sense for your business, sourcing acquisition opportunities, or taking care of the complex steps along the way, we’re able to secure successful acquisitions for our clients. Call one of our friendly advisers on 0800 975 0380 or email advice@forbesburton.com to find out how we can help you to navigate the M&A landscape.