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If you're a business leader looking to expand quickly, joining forces with another company can seem very tempting.
Merging allows you to grow larger instantly, gain more customers and market share, and get the upper hand against the dominant players in your industry.
But not all mergers work out as hoped. Without real strategic compatibility between the companies involved, these deals can fail or get stuck in an unproductive holding pattern after closing.
In this article, we'll break down the six main types of mergers, what's good and bad about each, and how to think through what will be the best fit for your business.
Let’s get started!
Before diving into the specific categories, let's quickly summarize some merger basics:
A merger is when two separate companies combine into a new entity. The companies essentially pool their resources, operations, and infrastructure to advance shared objectives.
There are a few key reasons companies may opt to merge:
Mergers can fuel faster growth but also carry risks like organizational challenges.
A merger agreement lays out the detailed legal terms dictating how two companies will integrate. It’s like a playbook spelling out exactly when and how these businesses will join forces.
This dense contract covers all the key issues that crop up when you blend two companies into one:
Spelling everything out upfront makes the process far smoother and boosts the chances they actually thrive together in the long run.
In an acquisition, one company purchases a controlling stake in another, which maintains some independence. With a merger, two firms agree to combine and become one single new entity together.
Some nuances surround the technical and legal differences between mergers and acquisitions.
But in general, an acquisition refers to gaining control of another company as a subsidiary, while a merger means integrating entirely into a new unified organization.
Putting together a strategic merger is incredibly complicated. Most business owners can use some expert help navigating all the moving pieces.
That's where working with a handpicked team of M&A advisors can make a huge difference. These pros have the experience of guiding countless companies through successful deals.
Rather than go it alone, taking the help of Exitwise allows you to easily assemble an M&A advisor squad tailored to your exact company and goals.
We line up the specialists you need while handling hiring and management and optimizing the entire merger process.
Leaning on targeted expertise makes pulling off these complex deals much more achievable. And when executed well, merging with the right partner can help take your business to exciting new heights.
Now, let's explore the six main categories of mergers and their unique characteristics in-depth:
Horizontal mergers join together two direct competitors within the same industry.
A horizontal merger is when two companies who compete with one another in the same market join together.
For example, imagine two rival computer stores that generally seek out the same set of customers came together as one larger retailer.
Rather than staying separate entities fighting over market share, these horizontal merger partners combine their strengths and customer base all under one roof.
It gives them the ability to sustain or expand without adjusting what they actually sell. Making your competitor an ally through merging can sometimes remove a significant obstacle to growth.
A well-known horizontal merger example is the blending of Sirius Satellite Radio and XM Satellite Radio in 2008. As the only two satellite radio providers in the US, they operated as direct competitors for years.
After merging with SiriusXM, the combined business attained greater scale, eliminated redundant costs, negotiated better deals, and provided diverse content to subscribers, making it a popular choice for many listeners.
Potential advantages include:
But possible disadvantages are:
In vertical mergers, companies at different points of the same supply chain decide to integrate.
A vertical merger is when two companies that work in related stages of producing something join together.
For example, picture a steel manufacturer merging with a company that makes automotive parts.
The steel maker creates a key material that goes to the parts supplier, who shapes it into components that are eventually used in car production.
Rather than operating as separate links in this supply chain, they would combine forces as one entity, controlling multiple steps in this process in a vertical merger.
Essentially, former partners in a supply sequence decide to formalize their relationship even further through a merger deal.
In 2016, Microsoft acquired the professional networking site LinkedIn in a $26 billion vertical merger deal.
As a software-as-a-service (SaaS) leader, Microsoft benefited by baking premium LinkedIn features into its solutions. And LinkedIn tapped into Microsoft’s cloud capacities and enterprise business relationships.
The acquisition allowed Microsoft to gain from product synergies utilizing LinkedIn data to enhance its Dynamics CRM.
Below are the primary advantages and disadvantages:
Advantages of vertical mergers potentially include:
Disadvantages may involve:
Conglomerate deals involve mergers between large firms operating in totally separate industries.
A conglomerate merger is very different from horizontal and vertical deals because it's between companies that are in separate industries and don't overlap.
For example, picture a hotel chain deciding to merge with a software developer - two unrelated market players combining forces.
By merging and managing disparate yet potentially complementary specialties, these conglomerate partners can realize a whole greater than the sum of their parts.
They aim to create a more varied, resilient, and robust entity by integrating their unrelated strengths.
One prominent conglomerate M&A example came in 2000 when Vivendi, a French utilities and media group, merged with Seagrams, a beverage and entertainment empire.
The $34 billion deal formed Vivendi Universal - a diverse new media and communications outfit.
Below are the primary advantages and disadvantages:
Advantages of conglomerate mergers potentially entail:
Yet possible downsides include:
Market extension mergers aim to expand an organization's customer base into fresh geographical areas.
A market extension merger is when two companies in the fundamentally same line of business combine forces to reach new geographical areas or segments of customers.
For example, envision two construction firms in different countries merging to tackle international construction projects jointly.
Even though the two companies specialize in construction and could be considered rivals to some degree, they can extend their combined market reach by merging.
Each may have only operated in local markets before, but they can now expand into more regions or even globally under one umbrella.
Sometimes, a market extension merger involves one company that is strong in the commercial space linking up with another focused on consumer offerings.
Together, they can meet the needs of both types of customers under one roof.
Facebook buying WhatsApp is a perfect example of a market extension deal. WhatsApp has a huge international user base, especially in developing countries.
Folding in WhatsApp, Facebook could immediately swell the number of people globally using its messaging services.
Even though Facebook already had its own chat tools, WhatsApp offered a foothold in key overseas markets where Facebook struggled to gain traction.
Below are the primary advantages and disadvantages:
Advantages of market extension mergers often entail:
But disadvantages may include:
Product extension mergers aim to combine complementary product and service lines.
A product extension merger is when two companies that sell complementary offerings join forces.
The idea is to create an expanded menu of products and services for their combined customer base without building new departments from scratch.
For example, imagine a company that sells printers merges with one that sells ink cartridges. Each provided distinct supplies to the same target market.
Rather than a printer company needing to establish its own ink production line and an ink company having to design printers, the two join forces to become a consolidated shop for all printing-related necessities.
One famous product extension M&A example came when Facebook purchased Instagram in 2012 for about $1 billion.
As the old adage goes, luck is when preparation meets opportunity, and Facebook seized the opportunity to expand its product offerings and demographics through the acquisition.
Facebook attained Instagram’s photo-sharing platform and younger demographic base. Instagram tapped into Facebook’s resources, data tools, monetization team, and business savvy.
The acquisition was initially met with some backlash, but it ultimately proved to be one of the most successful tech acquisitions, helping secure Facebook's dominance in social media.
Below are the primary advantages and disadvantages:
Key advantages of product extension mergers often include the following:
But disadvantages potentially involve:
Reverse mergers allow private companies to go public by acquiring publicly traded firms.
A reverse merger works backward from most other merger types we have discussed. It's when a private company buys out a publicly traded company, taking control of it.
The private company gains quicker and easier access to having their stock publicly traded, investors, and capital funding this way - skipping the elaborate traditional process of going public.
They can avoid the tedious paperwork and compliance rules required for an IPO.
It's a neat trick - almost like slipping in through the back door to public listing by merging with and assuming control of an existing access point.
Often, a framework called a reverse triangle merger is used to accomplish this backing-in to public markets. The private company sets up a separate, wholly-owned subsidiary. This offshoot then buys a controlling stake in the public firm.
Structuring things this way legally separates the private company's leaders from the public entity's existing obligations or lawsuits. The subsidiary absorbs any baggage, insulating its parent private firm.
This triangle legal architecture - creating a wholly owned middleman to assimilate the public business - limits risk exposure for the private owners actually orchestrating the acquisition.
The subsidiary acts as both the deal broker and liability firewall.
A famous case came in 2012 when Burger King merged with a subsidiary of Justing Holdings Limited.
Burger King had struggled with declining profits as a public company, so it went private in 2010 when bought out by investment firm 3G Capital. This gave them breathing room to fix things without shareholder pressure.
But just 2 years later, they did a reverse merger with a company called Justice Holdings to regain access to public trading on NYSE and new capital.
Burger King created a subsidiary that took over Justice Holdings, a public shell company. This backdoor approach let Burger King start trading publicly again under a new stock ticker. It was a clever pivot to fuel their operational reboot behind the scenes.
Below are the primary advantages and disadvantages:
Advantages of a reverse merger often include:
Yet disadvantages potentially consist of:
Below, we'll address a few common merger-related questions that often arise:
The "20% rule" refers to a regulation that requires shareholder approval for certain mergers and acquisitions (M&A) deals. Specifically, if the buyer issues new shares or other securities equal to 20% or more of its existing voting shares as payment for an acquisition, it must get approval from its shareholders.
The rule is meant to protect shareholders from losing too much value or control. A lower 5% threshold applies if the deal involves a major influence like a director or large shareholder on the buyer's side.
Triggering this rule can make M&A deals more difficult in several ways. The buyer may need to offer a higher price to convince shareholders or structure the deal creatively to avoid the rule.
Not at all. Merger equity splits vary drastically based on the respective companies' valuation, size, debt levels, growth prospects, and bargaining power.
While mergers aim for relatively equitable combinations, one firm often emerges with a majority stake.
In a stock merger deal, both companies’ shareholders receive newly issued shares in the consolidated entity proportional to valuations.
In a cash buyout, the selling company’s investors receive direct cash compensation, funded via the acquiring company’s reserves or outside financing.
We’ve just explored definitions, examples, pros, and cons for the six primary types of M&A deals.
As the ideal merger route depends heavily on your specific objectives and situation, take time to systematically assess options with qualified advisors.
Exitwise simplifies this process by connecting you to proven M&A experts suited to your sector and goals.
Our customized solutions handle vetting, hiring, and managing a cohesive M&A dream team so you can focus on negotiating the best possible deal.
An experienced M&A squad by your side can make all the difference in unlocking this transition's full potential. Contact us for a consultation.
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
