Mergers and acquisitions (or M&As) not just happen to big corporations, but also to small and medium enterprises. To guide parties when searching on how to strategize their M&A to their advantage, it’s best to know the different types of mergers and acquisitions.
What are the 4 types of mergers and acquisitions?
There are 4 main types of mergers and acquisitions that were tested and proven – but not without any complications – by previous M&As in Canada:
- Horizontal
- Vertical
- Conglomerate
- Congeneric
Parties use M&A to either increase sales by reaching out to more consumers, or to cut costs in production. Choosing what type best suits you will really depend on your financial goals.
Other factors may also come into play, such as your business type and the other party’s, your available resources, etc.
We’ll go over the main types of mergers and acquisitions to guide your business. Before we get started, read our article on M&A laws as a primer.
1. Horizontal
If you and the other party to the M&A are in the same line of business, then a horizontal M&A is what will happen.
Horizontal M&As usually occur when the two businesses are in the same industry or in the same sector. For example, Company A merges with Company B, which are both in the telecommunications industry.
The most common horizontal M&As happen between companies that serve different areas, such as when Company A is in Ontario, while Company B’s is in British Columbia.
It may also happen to two companies that offer similar products or services. For instance, Company A and Company B are both internet-service providers.
In other words, you either acquire your competitor, are acquired by your competitor, or merge with your competitor. Unthinkable, right? Horizontal M&As have benefits and disadvantages to be wary of.
Benefits
When competitors merge or acquire the other, the new company will now have markets across the areas that the two companies only served separately pre-M&A.
Also, the new company will have more economic gains with an increased customer base. It would be in a better position than its remaining competitors, compared to when the two companies operated on their own.
This is also the most common type of merger and acquisition because it’s the easiest for both parties, especially during the integration process.
Disadvantages
Easy as it sounds, merging or consolidating similar businesses also has its downside. While you and the other business may be giants in your own space, being previous competitors may result in a “hostile” takeover.
This may affect how negotiations roll or the difficulty in reaching a final M&A deal. With the help of your M&A team, including a lawyer for due diligence, these disadvantages are overcome.
2. Vertical
When M&A occurs between two unrelated companies, that is called a vertical M&A.
This type of merger and acquisition transpires “vertically” because we’re talking about the same supply chain. While the two companies operate in the same supply chain and produce a common product or service, they are positioned differently in the supply chain.
For example, Company A, which is a product manufacturer, merges with Company B, the end-seller of the products made by Company A. Post-M&A, Company AB (the new company) now controls certain – or all – stages of the production process.
Vertical M&As may also occur the other way around. In our previous example, Company A may target to merge with or acquire Company C, another business that produces an integral part of Company A’s product.
Benefits
If horizontal M&As stretch out the reach of the newly born company, vertical M&As lower the costs of production for the new company. Since the new company has assets for certain stages of the supply chain, it can now dictate the production costs or control them to a certain degree.
This makes vertical M&A a great strategy for companies that are labor-intensive and production dependent. It aims to reduce the costs of raw materials and the delivery of products or services downstream.
Disadvantage
Vertical M&A is another great formula for a “hostile” merger or acquisition. If not done carefully, the two companies involved may clash with each other, especially with the employees of the different supply chains.
Wondering about the difference between mergers, acquisitions, and takeovers? The video below will explain its differences, including some of the famous examples, and what it means to be in a “hostile” takeover:
Canada has seen some high-stakes mergers and acquisitions – read about them in our article on the all-time biggest mergers and acquisitions.
3. Conglomerate
While the other types of mergers and acquisitions involve companies that are related to each other at some point, conglomerate M&As defy this formula.
Conglomerate M&A occurs between two companies that are completely unrelated to each other. For example, Company A may be involved in the industry of technology while Company B produces liquors and beverages.
Benefits
What is the result in a conglomerate M&A? It depends on the parties. Companies may want to use conglomerate M&As to acquire the assets of the other company which will stabilize the financial struggles of the other.
Diversification of products may also be the cause. It will ensure that even if one product line has some bad days, the newly formed company will not suffer significant losses because it has another product line.
Disadvantages
In the exploration of new lines of businesses, the new company may lose sight of its core business. It may mishandle the other product line or mismanage the operations of the new company itself.
This type of merger and acquisition may also result in a clash of corporate cultures between the employees of the two companies. Differences may occur, but conglomerate M&A means true expansion when it’s successfully done.
4. Congeneric
Congeneric M&A is one of the types of mergers and acquisitions that works similarly to horizontal M&A. The difference is that congeneric involves companies that sell different products, but to the same market or target consumers.
For example, Company A sells laptops, while Company B sells computer accessories. They have different products, but they target the same set of customers. Imagine checking out your new computer unit, but you’re also offered the external mouse, audio headset, antivirus software, among other accessories.
Benefits
This twist to horizontal M&A diversifies the products of the new company. Congeneric M&A also rakes up additional income for the new company because it now provides almost everything that their customer may need. Instead of going to other competitors, here’s the new company that has it all.
Disadvantage
Tendencies are that the new company may be stuck with the sector or industry that it’s been operating. It may have diversified as to its products, but reaching out to other sectors or industries may be difficult.
Once the industry has weakened, the company may have difficulty recovering, unless it adjusts its product line to serve another consumer base.
Who regulates mergers and acquisitions in Canada?
Canada’s Competition Act regulates M&A in the country, regardless of the different types of mergers and acquisitions that have been used.
The Act is administered and enforced by the Competition Bureau, headed by the Commissioner of Competition.
To know more about these types of mergers and acquisitions, hire the best mergers and acquisitions lawyers in Canada as ranked by Lexpert.