4 Different Types of Acquisitions With Examples - Choose Wisely
When selling your company, the type of acquisition you consider can influence your exit strategy and how much you make from the sale.
In this article, we draw from our extensive M&A experience to provide insights into four main types of mergers and acquisitions and how they influence business strategies and growth.
TL;DR - Types of Acquisitions
Here are the four main types of business acquisitions we'll discuss in detail in an upcoming section:
Vertical acquisitions
Horizontal acquisitions
Conglomerate acquisitions
Market extension acquisitions
When planning to exit your business or company, deciding on the most favorable acquisition type can be challenging.
We can help you find the right advisory team to break down the different types and their implications to make choosing easier.
Schedule a chat with us at Exitwise to get the help you need to hire and manage wealth advisors, tax accountants, business brokers, and other M&A experts you need.
What is a Business Acquisition?
A business acquisition is a company merger in which the acquiring company takes over the acquired or target company and becomes the new owner.
Typically, the acquired firm retains its name but becomes a subsidiary or division of the acquirer. The firm may continue operating independently but usually under new management by the acquirer.
A company acquisition usually involves the acquiring entity legally buying over 50% or all of the shares of the target company.
Buying the majority or all of the shares helps the acquiring company gain control over:
The target firm and its assets
Resources
Customer base
Operational premises
Market share, and more.
Acquisition vs. Takeover vs. Merger
All three are types of company sales or purchases.
An acquisition is a primarily friendly deal in which the acquired company is now owned by the acquiring company.
A merger refers to a company combination in which the acquirer and target company mutually come together to form a consolidated new entity.
In a true merger, the combining companies are usually equal or roughly equal in scale of operations, size, and market share.
Mergers and acquisitions are often used interchangeably, even when they mean slightly different things.
A takeover is a company combination in which the acquirer forces the acquisition by actively buying a large number of shares of a target company whose management or board of directors oppose or resist the purchase.
In a takeover, the acquirer typically bypasses the management or board of directors and negotiates directly with the company's shareholders, convincing them to make the deal or bring on new leadership to approve the purchase.
Example of Acquisitions
Let's check out some well-known business or company acquisitions to inform your exit plan:
Most Common Methods of Acquisitions
An acquisition in business can be based on several methods, giving rise to different types of business combinations.
For example, the acquisition can be based on the relationship between the buyer and you as the seller.
Vertical, horizontal, market extension, and conglomerate acquisitions stem from this model, depending on the positions of the companies. In a horizontal acquisition, the acquirer and target company are direct competitors.
You can also combine your business with another using the contractual method through an asset sale or ownership interest purchase.
This contractual or non-statutory method can result in types of M&A deals such as asset acquisitions, interest acquisitions, and share acquisitions.
Different Types of Acquisitions
Knowing the specific details of each type of merger and acquisition can help you determine the most favorable for your exit.
Here's a deeper examination of the four major acquisition types:
1. Vertical Acquisitions
A vertical acquisition or merger occurs when a company acquires another company at a different supply or value chain level within the same industry.
The acquisition is called vertical because the acquired company is either downstream (such as a retailer) or upstream (such as a supplier) in the distribution or production stages.
Vertical acquisitions aim to gain more control over the production or distribution chain, reduce production costs, improve operational efficiency, and increase revenue.
Vertical Merger Example
In 2002, eBay acquired PayPal and made it its wholly-owned subsidiary. The integration reduced operational costs and expanded the two companies' networks before their separation in 2015.
2. Horizontal Acquisitions
In a horizontal acquisition or merger, two competing companies in the same industry with similar markets and product or service lines come together.
The aim of a horizontal merger is to improve economies of scale, expand the market, eliminate competition, increase market share, and increase revenues.
Horizontal acquisitions also help well-established companies that have reached their maturity peak to remain relevant and keep growing. For example, they can add new product or service variations when they acquire smaller companies.
Horizontal Acquisition Example
21st Century Fox acquired Star India, which owned the Hotstar streaming platform.
Hotstar was integrated into the acquirer's Disney+ streaming platform to form Disney+ Hotstar, which helped the acquirer outdo Netflix and Amazon in streaming services in India.
3. Conglomerate Acquisitions
A conglomerate acquisition involves companies with no business relation because they are in completely different or unrelated industries.
After the merger, the firms can share their markets, assets, and customer bases. They can also improve efficiency, leverage complementary strengths, spread risk, or diversify.
Conglomerate Acquisition Example
Amazon acquired Whole Foods, a health-food supermarket chain facing increasing competition from smaller businesses. The merger helped Amazon expand its grocery shopping.
4. Market Extension Acquisitions
A market extension acquisition involves companies that offer similar services/products and are based in different geographical markets within or outside country borders.
The companies merge to expand their market reach and customer bases and realize revenue or technology synergies.
Market Extension Acquisition Example
In 2008, the Belgian-based brewing company Inbev acquired the American brewer Anheuser-Busch to form Anheuser-Busch Inbev. The merger created one of the world's top five consumer brands.
When the company later acquired SABMiller in 2017, it created a portfolio of 500 brands spanning 50 countries.
Pros and Cons of Pursuing an Acquisition Strategy
Using an acquisition strategy to exit your business as a seller or enter new ones as a buyer comes with various advantages and disadvantages:
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As a business owner looking to sell your company in the near future, adopting an optimal exit mindset can help you maximize the value of your business and secure a successful sale at a higher sale price.
Check out our free business valuation calculator to estimate the value of your business in real time.
Hire Exitwise to Find the Best M&A Experts
As mentioned, it's advisable to work with M&A experts who can help you understand the different types of M&A transactions and help you choose the one that most favors your business interests.
At Exitwise, we can help you find and manage the top M&A professionals who are well-versed in your industry, including M&A attorneys, tax accountants, investment bankers, wealth advisors, business brokers, and valuers.
Reach out to us today to explore our proven three-stage process for hiring the best M&A experts who can help maximize your business exit.
Frequently Asked Questions (FAQs)
Here are some common questions to conclude our discussion:
What is the Purpose of an Acquisition?
Different types of business acquisitions serve different purposes. You can expect objectives such as:
Risk mitigation
Diversification of investment
Capturing cost and revenue synergies
Achieving economies of scale
Improving competitive advantage
Increasing market share
Reaping tax benefits (in some cases/countries)
Accessing new markets
Reducing or eliminating competition
What Are the Characteristics of a Friendly Acquisition?
A friendly acquisition is the opposite of a hostile takeover and is characterized by the mutual participation of the merging companies. The acquired company’s management or board of directors agree to the merger.
The acquirer buys over 50% of the target company's stock and other assets and can make decisions regarding the assets without seeking the approval of the company's shareholders.
When you consult with us at Exitwise, you can increase your chances of getting a friendly acquisition that protects your interests and those of your employees.
What is a Reverse Acquisition in Corporate Mergers?
A reverse acquisition is a business combination in which a private company purchases a public company.
The owner or shareholders of the private company become controlling shareholders in the acquired firm.
Conclusion
When it comes to exiting your business or company, knowing the different types of acquisitions can help you choose the most favorable strategy to maximize your gains.
Choosing the best acquisition type can be overwhelming, so we at Exitwise work with you to find the best M&A experts to streamline your exit process.
Schedule a consultation with our team today to find your dream M&A team for an optimal exit.
