4 Types of Mergers and Acquisitions in the Financial World
In corporate finance, mergers and acquisitions are growth strategies meant to make companies stronger, more competitive, and cost-efficient. While the general purpose of mergers and acquisitions is to increase profitability, the two strategies are slightly different. With an acquisition, a larger firm purchases more than half of a smaller firm’s ownership, therefore allowing the larger company to directly manage or oversee the smaller one. With a merger, two companies join or merge together, and work towards a common set of similar interests and goals. Here are the most common merger and acquisition types.
A vertical merger occurs between two or more companies who produce separate materials or services to create one specific finished product. Also known as vertical integration, this type of merger appeals to companies within the same industry that may not be directly competing with each other. It is a tool for them to combine operating costs, ensure quality, control access to resources, and streamline production efficiency. Two businesses that combine operations are often controlled by a third parent company that handles both aspects of the production cycle as a single entity. An example of a vertical integration is an automobile company merging with a business that supplies automobile parts. This allows for the company to purchase parts at lower costs while guaranteeing and even, expanding revenue streams for the supplier company.
Horizontal mergers take place between two companies in the same industry who are direct competitors. Also considered as a business consolidation, the goal of a horizontal merger is for the two companies to create a more efficient and effective business operation. When two industry-leading companies merge, they are able to decrease competition, offer a wider range of products or services, expand the reach of distribution, and pool resources. An example of a horizontal merger took place between Disney and Pixar in 2006. Once merged, the two entities were able to increase their market share, access new customers, and reduce competition.
Acquiring technology has become increasingly popular as more industries have become tech-driven. This requires consistent use of new innovations to stay competitive. A technology-based corporation will outright purchase the technologies that were created and patented by another company with the intent to enhance and improve their own products. The benefits of this process are numerous. With little time and resources needed, costs become minimal to development and implement. Additionally, the decision to purchase the technology versus paying patent royalties also cuts expenses. Finally, acquiring allows the buying company to keep the coveted technology out of their competitors’ hands. Apple has successfully acquired several technologies, including the automated personal assistant Siri in 2010, the speech-recognition-technology company Novauris in 2014, and the audio product and technology company Beats Electronics also in 2014.
Acquisition of Assets
In an acquisition of assets, the purchasing company gains the assets of another company as opposed to purchasing its stock. The company whose assets are acquired is known as the target company and in many cases this occurs during bankruptcy proceedings. The purchasing company is able to take advantage of the target company’s position, by buying their materials, equipment, or facilities at lower prices. The target company receives cash for their assets, which is used to pay off debts, if they have any, and liquidate or enter into another business. These types of acquisitions occurred frequently in the financial services industry due to the financial crisis during the late 2000s. For instance, many companies purchased competitors that fallen during the recent economic downturn.
Companies both small and large must make strategic moves to grow their businesses well into the future. While the right merger between two businesses can lead to a stronger, more profitable company, the wrong union can be detrimental to both parties. Business and financial professionals should understand all types of mergers and acquisitions to determine how their company will best benefit.