What Type of Company Should I Sell To? Five Types of Mergers and Acquisitions

If you are considering selling your business, then you are more than likely contemplating what type of company you want to buy your business.

As mergers and acquisitions are, broadly speaking, categorised into five different types of merger/acquisition, varying on whether the two companies are operating in the same markets or have the same products etc., this means that you have a choice of acquirer – you do not, necessarily, have to choose a buyer in the same industry doing the same thing.

Below details these five types of merger, along with benefits and disadvantages, and real examples from the industry.

 

Horizontal Integration:

Horizontal integration is where two companies operating in the same industry, therefore offering similar products or services, merge together to produce a larger entity. Alternatively, a larger entity acquires a smaller company and integrates it into its own operations.

For example, a car manufacturer merging or acquiring another car manufacturer.

In this example, the two car manufacturers would be directly competing with each other and they would benefit from horizontal integration by eliminating competition and increasing market share.

Additionally, as the two entities are operating in the same space they can benefit from economies of scale as the cost of production reduces due to higher volumes. They could also save costs as they can combine teams such as sales, marketing and administration departments or, alternatively, benefit from having access to such a team if one of the companies did not have this in place previously.

As well, if Company A produces a specialist product or service, then Company B could integrate this into operations and offer this product/service to its customers.

While there are a wealth of benefits to horizontal integration, the seller needs to be aware if being acquired by a larger organisation. The two companies need to establish that their cultures will work together and that the larger organisation can be managed, as synergies do not always come into fruition if the two companies clash.

Also caution needs to be exercised if the seller wants to remain loyal to existing staff, as combining teams to save costs could lead to redundancies.

Real-Life Examples:

PepsiCo acquired Quaker Oats to have access to its product, Gatorade, in order to have a larger market share of the non-carbonated soft drinks market.

Recently, T-Mobile and Sprint announced an agreement to merge to reduce competition as well as the joint entity claiming that its combined resources will help it create a 5G network.

 

Vertical Integration:

Vertical integration is where two companies who are in charge of different parts of the supply chain combine – for example a brewery bought by a company that owns and controls bars or pubs.

A company at the end of the supply chain can secure benefits such as controlling the supply chain, such as innovations, delivery and price. Controlling the supply chain can also restrict supply to competitors, enabling a greater market share.

Vertical integration has its benefits insofar as controlling the supply chain, but this type of merger could dilute Company A’s core business. This is because the two companies’ operations are completely different and could restrict the amount of capital put into new opportunities in Company A’s original marketplace.

Real-Life Example:

Apple is a famous vertical integrator, and its recent proposed acquisition of Dialog Semiconductor will allow it to develop power management circuits in-house.

 

Market Extension:

Market extension is where two companies which deal with the same products/services in different markets combine. For example, a distributor of pharmaceuticals in the UK merges with or acquires a distributor of pharmaceuticals in Germany so products can be sold in new locations.

The obvious benefit to market extension is that both companies have access to a wider market but a smaller company must be wary – when a local company is acquired by a larger national company what made it initially successful may be weakened or there could be a clash in business cultures.

Real-Life Example:

A famous merger often quipped for market extension is the acquisition of Eagle Bancshares by RBC Centura, both banking companies. The acquisition enabled RBC to pursue growth operations in the North American market.

 

Product Extension:

Product extension is between two companies that operate in the same market and offer related products – for example, a company that creates DVDs merging with a company that manufactures DVD players. The two companies might utilise similar distribution channels, use related production processes or similar supply chains.

The advantages to this is that the combined entity’s client base is expanded and helps with the cross-selling of products. However, as with other mergers or acquisitions it is important that the core business is not diluted.

Real-Life Example:

The acquisition of Mobilink Telecom by Broadcom, enabling Broadcom to enter the handset baseband market, which complemented its wireless products.

 

Conglomerate Merger:

A conglomerate merger involves two companies that have unrelated business activities. The clear advantage of this is that both companies diversify their operations, placing less reliance on a certain business. The combined entity can also benefit from increased market share, synergy and cross-selling opportunities.

The companies merging must be aware, however, as diversifying could take resources away from core operations. The acquiring operation needs to have adequate experience in the field it has entered to make sure it doesn’t underperform.

Real-Life Example:

A famous conglomerate merger was Walt Disney Company’s acquisition of the American Broadcasting Company.

 

As can be seen, there are several types of merger/acquisition which have their various advantages and drawbacks, suiting different types of companies. When considering selling, the different types of mergers and acquisitions need to be weighed up, choosing a direction that complements your objectives post-completion. At Benchmark International, a vast and growing number of contacts together with a unique approach where all potential acquirers are approached and exhausted, enables sellers to choose the right route.

 

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Call Benchmark International today if you are interested in an exit or growth strategy or if you are interested in acquiring.