Mergers and Acquisitions: Types, Examples & How They Work
Updated on October 11, 2023
Mergers and Acquisitions (M&A) often take place on a scale that is unimaginable for most people.
However, this doesn’t have to be the case. We’re going to guide you through the world of M&A, talking about the types of deals, how they work, and even how you can get involved.
First, we’ll begin by establishing what mergers and acquisitions are and how the two terms differ.
What are Mergers and Acquisitions?
Mergers and acquisitions are defined as the process of combining one company with another either through creating a new joint venture, or by absorbing one company into the other.
This is where the difference between the two terms comes from and is perhaps better presented as merger or acquisition.
To dive into this further, a merger is the consolidation of two companies. Consolidation is where two companies join under the banner of one new company and agree to move forward as one.
An acquisition is where one company purchases another and takes over the running of it. The target of the acquisition might remain in name but it ceases to trade from a legal standpoint, as everything is now run through the purchasing company’s books.
These two terms are often grouped together and used as an umbrella term for any type of deal that involves one company purchasing another. You may have heard the phrase “no two deals are the same,” and this is particularly true when discussing M&A. Each deal will have its own unique structure; however, there are some similarities that we can pick out.
Types of Mergers and Acquisitions
There are a few types of M&A deals that are seen time and time again. That’s not to say they are all the same, but grouping them together helps us see how mergers begin to work and why they are an important part of the business world.
Horizontal Merger
Horizontal mergers are mergers that happen between companies in the same industry. Often, these companies are competing in the same market, which means they are direct rivals. Their products or services are similar; therefore, they are vying for the same customers.
The benefits of horizontal mergers are evident. They allow companies to increase their market share by minimizing the competition and the revenue and profits of the acquired company now go to the company in charge.
One example of this was Facebook acquiring Instagram in 2012. The two giants of social media were rivals competing for a share of the users and their data before the acquisitions took place. Facebook now has control over Instagram and a much larger share of the market, as well as the data that comes with it. Both platforms still run as if independent, but this merger gives Facebook a much stronger foothold in the industry.
Vertical Merger
A vertical merger occurs between two companies at different stages of the same supply chain. The obvious example of this is a company taking over the supplier of their product.
If the owner of an affiliate website buys the content agency they use to write their blog posts it would be a vertical merger. Now, instead of paying a markup cost on the production of their content, they can get it for a lower price and also make money from supplying other businesses. There is a two-fold positive to owning companies in the same supply chain which makes vertical mergers an attractive prospect.
Both horizontal and vertical mergers can cause the government to step in, particularly in deals of considerable size. This is because they can give companies too much control. If a company uses a vertical merger to control the supply of goods, it would be possible to restrict the flow of products to rival companies. Similarly, a horizontal merger could give a single company far too much influence. This is often seen in mergers in the finance and media industries.
Congeneric Merger
Congeneric or product-extension mergers happen when two companies have different products but a similar customer base.
If a bank takes over an insurance company, this allows the bank to offer another service to its existing customer base. Both companies are in the financial industry and it allows the bank to sell two mutually beneficial services. If a customer comes in for one service or product, the bank has the ability to sell them the other. This establishes the company as a one-stop-shop and provides convenience for consumers. It also diversifies their services and increases their profits.
Conglomerate Merger
A conglomerate merger is a merger between two companies from unrelated industries.
This isn’t seen as commonly as the other types of mergers, and it may seem strange for a company to enter a new industry. While this does pose a risk, one of the main benefits of this type of merger is that it allows the company to expand its portfolio and diversify risk across two industries. This is particularly attractive for its shareholders.
This could be a strategic move if a company is thinking of entering a new market; they can buy their way into it rather than starting from scratch. The rewards of this are access to an existing customer base and market share. However, this is also the risk of a conglomerate merger, as it can stretch resources if the correct operating procedures are not in place.
Market-Extension Merger
A market-extension merger takes place between two companies that sell the same product but in different markets.
If a car manufacturer is prominent in the United States but nowhere else and wants to venture into other territories, a market-extension merger might be considered. This would involve the car manufacturer merging with a manufacturer that is prominent in another country, say Canada. A merger would mean they now own two successful companies in two different markets.
This allows them to enter new territory with immediate results by acquiring the other company’s customer base and the profits that come with it. Without a merger, they would have to spend time and money establishing themselves in a market where consumers are not familiar with their product or have loyalties elsewhere.
How do Mergers and Acquisitions Work?
As you can imagine, M&A deals can be complex, and every potential deal needs to be scrutinized. Companies will often use a team of M&A professionals or a brokerage firm to aid with the acquisition.
The first part of the process involves setting up goals for the company and understanding what they hope to get out of a merger or acquisition.
Establishing an Acquisition Strategy
The acquisition strategy will be different for every company.
The objective of the acquisition is categorized into two groups: strategic and financial.
Strategic M&A deals take place when companies target other companies that are in the same or similar industry. For example, a well-established company might outline a young but fast-growing company as an acquisition target. This young company might become a significant rival, but by absorbing it into their portfolio it ensures that they remain on top and may even strengthen their share of the market.
Financial M&A deals usually come from a firm that has the finances to go out and secure investment opportunities. This is something that’s seen with private equity firms and family offices, where they are given a budget to acquire an asset they can sit on or try to improve in order to get a positive return on their investment over time.
Deals with a purely financial intention may not have a target market or product in mind, as it’s more about operating the company on a hands-off basis. Instead, firms will look to employ people who can control this for them so they can collect the profit.
Valuation is Everything
Just because a target has been identified for an M&A deal does not mean it will happen. There’s still a long way to go and it hinges on valuation.
Sometimes there can be three different valuations; the buyers, the sellers, and the market value. How the seller values their company is usually a sign as to how willing they are to sell. This is why a brokerage is sometimes used as they help outline the market value and act as the go-between for both parties.
If a company is open to the possibility of selling, then a dialogue can begin between the buyer and seller. This is where the buyer will seek more detailed information about the business to analyze whether it’s a viable target. If the buyer is still interested they can enter negotiations on valuation and structuring an M&A deal.
The Process of Due Diligence
Once a deal has been accepted in principle, the process of due diligence begins.
This is where the buying company will assess the selling company’s standing as compared to the valuation to prove its worth. Accounts, assets, liabilities, and every other part of the target companies operations will be analyzed. This can make or break an M&A deal.
Due diligence for an M&A deal can be a time-consuming process; the larger the deal the longer it can take. A back and forth between the buyer and seller will occur in order to answer any questions that might arise.
Agreeing on a Deal and Post Sale Success
If the period of due diligence is completed without any major issues and both parties are happy to move forward with a deal, then the contracts will be drawn up.
This will be a final agreement on the valuation, the deal structure, and any additional terms. It’s common to see large deals include an earn-out period. This is where the offer will come in lower than the valuation but there will be provisions put in place that the seller earns out the purchase price once certain financial targets are met.
With the contract signed, the teams can work on merging the two companies.
How to get into Mergers and Acquisitions
Some of the M&A deals that we’ve already talked about in this article will sound unattainable to most people. The idea of getting into M&A will sound impossible, short of winning the lottery.
There are two main ways you can get into M&A, one of these being the conventional route and the other might be something you’ve never even thought about before.
Becoming an M&A Professional
When you’re dealing with people’s money you need to prove your up to the task.
The beginning of this for most M&A professionals is getting qualifications through higher education. Studying accounting, finance, business, or law can provide you with the necessary platform to specialize in M&A. While qualifications are not always required, you would be expected to at least go through some sort of internship.
Working for an M&A firm won’t be for everyone. You will need to know your way around a balance sheet, be very comfortable with numbers, and have a good understanding of how business valuation works.
Competition to move up the ladder is fierce so be prepared to network and shake a lot of hands to get you where you want to be. The payoff can be a high paying job in an exciting industry.
Building Your Own Empire
You could learn how to become an investment banker or work your way up in a private equity firm, but this might not be possible for everyone. However, it doesn’t have to be like this. There’s a scale to M&A that makes it possible to create your own empire.
The building, buying, and selling of digital assets has become big business. A digital asset is an umbrella term for an online business that includes, websites, Amazon FBA stores, and software as a service, amongst many other business types.
The attractive aspect of this for most entrepreneurs is how accessible online business is when compared to brick and mortar. You can run an online business from anywhere with a laptop and internet connection. Also, the entry points at which to acquire a business are much more attainable due to the spread at which digital assets are valued.
As shown by our buyer personas, it’s possible to start as a Newbie Norm. This is someone who knows little about online business but is willing to learn. From here you can start to work your way up to the more active personas. When you start getting to the level of Portfolio Paul, you can act like you have your own M&A firm; acquiring assets from the revenue you’ve earned and building up your very own empire of digital assets.
Like anything, this is going to involve you putting in the hours of hard work or being prepared to hire people who can. There’s no sure-fire way to success but the results can be very promising. A return on investment series we published on content sites and Amazon FBA highlights why it’s an industry you should consider if you’re wondering how to get into M&A.
What to Look for in Mergers and Acquisitions
There are many reasons for mergers and acquisitions, but the overarching reason for an M&A deal is to improve or solidify a company’s status. This objective is going to be the motivator for finding M&A deals.
Due to this, there are going to be several targeting factors in what a company will look for. The criteria for a target deal could be any one of the reasons below, or it could have the benefits of multiple.
An Undervalued Asset
Valuation is something that can be open to interpretation. If you can spot a company that is performing better than you think a valuation would suggest, then it might represent an astute acquisition.
If you believe you can take a company and improve its performance, then it would also be a valuable investment. Taking a company and growing is beneficial in two ways: first, you are increasing the monthly revenue which will speed up your return on investment. Second, you are increasing the valuation from which you bought it, allowing you to sell for a profit.
Diversifying Risk and Reward
Spreading your risk across multiple assets is a smart way to operate. Being all-in on one business can leave yourself exposed if something was to drop in performance or even fail. Diversifying your portfolio of businesses allows you to minimize this risk.
The hope is that the negative performance in any one asset will be balanced out by other high performing assets. Having a diverse portfolio of businesses from varying industries will help negate a drop-off if demand for one particular industry decreases.
This strategy should be approached with caution as you don’t want to overexert your resources. Acquiring new assets takes money and manpower, and if this starts to take away from your current assets then you will want to reassess the plan.
Diversification is also seen in many of the types of mergers and acquisitions we talked about earlier.
Product-extension mergers help shift the reliance from one line of products to multiple. You now have two sources of income and are diversifying your products to account for any changes in demand.
Market-extension mergers diversify the territory your business operates in. This is a power move as you now have a share of two markets and the possibility to cross-sell products to expand even further.
Greater Share of the Market
Building a company from the ground up takes time. For the launch phase, there might not be any revenue being generated. If you have the capital, a merger can allow you to skip this phase and own an asset that is already making money.
This strategy also allows you to purchase a greater share of the market. Mergers can give you instant access to customers, territories, and products that can take years to build up.
A strategic merger can be used in an attempt to boost the success of your current company. Acquiring a rival company will minimize the competition.
Examples of Mergers and Acquisitions
Considering the size of some mergers and acquisitions, they often fly under the radar if you’re not up to date with your business news. There’s a lot of work that goes on behind the scenes but that doesn’t mean they’re always successful.
Here are a few examples of M&A deals that show it doesn’t always go to plan but when done right can greatly strengthen a company’s standing in the market.
Google and Android
An example of a successful acquisition was Google purchasing Android for a reported $50 million back in 2005. Fast forward to today, and Android is one of the most popular cell phone brands on the market.
At the time of the acquisition, Android was a relatively unknown company with startup origins. With the cell phone market on the up, Google spotted an opportunity to purchase a device that would allow them to compete against rival companies like Apple.
Having the firepower of one of the world’s biggest tech companies certainly helped make this a very successful acquisition. However, it also allowed the company to save a lot of time developing a product from scratch. When things move as quickly as the technology industry, any time Google spends out of the market creating a product would be money lost.
Disney and Pixar
Both Disney and Pixar have become synonymous with children’s entertainment in their own right. Then in 2006, Disney merged with Pixar in a deal worth $7.4 billion.
A merger or acquisition can sound one-sided, with the company doing the acquiring getting the better of the deal if things plan out. In this case, the financial backing of Disney and its platform helped increase Pixar’s production rate and marketability further than they ever could. This was a mutually beneficial deal that made perfect business sense.
Daimler Benz and Chrysler
An example of an unsuccessful merger would be the merge between the car manufacturers Daimler Benz and Chrysler. Priced at $35 billion, it was the biggest merger of its kind when it was announced in 1998.
The merger of two giants in the car industry was supposed to streamline their operations and protect their US market share from growing rivals. What happened was a clash of ideals, with personnel from either side not seeing eye to eye. Essentially, the brands were too different, and rather than making things more efficient it caused issues that held up any major expansion plans.
Jump forward to 2007, Daimler Benz sold Chrysler to a private equity firm that specialized in handling troubled companies for $7 billion. This was a huge decrease in valuation that stalled both companies rather than enhancing them. This proves the point that not all M&A deals are successful.
Things to Remember
After reading this article you should now have an understanding of what mergers and acquisitions are. Learning about the types of M&A deals will give you the necessary skills to spot when there are profitable opportunities to be had.
If you want to take action on this knowledge then remember that the world of M&A isn’t all billion-dollar deals. We’ve given you an insight into how digital assets can be the springboard that allows you to buy and sell online businesses in M&A type deals.
Sign up to our marketplace to see what kind of deals are on offer or arrange a call with one of our sales professionals if you need more information. It might be the start of your very own million-dollar portfolio that sees you executing successful mergers and acquisitions for a living.
