In today’s competitive landscape, more companies choose mergers and acquisitions (M&As) as the best-fit option for business growth and expansion.
While large-scale transaction volumes remain below historical averages, more than USD 10 billion in M&A deals marked a staggering 26% YoY growth in Q4 2024. Business analysts forecast further M&A rise in 2025 across tech, finance, and healthcare sectors.
Two companies may voluntarily merge their assets to create a new business entity, or a business may purchase the target company’s assets.
M&As occur when businesses want to access new markets, diversify their product portfolios, or gain synergies. The primary tasks involve determining the target company, setting the timeline, and identifying the most appropriate M&A type.
Given various types of mergers and acquisitions ranging from horizontal and vertical to conglomerate and concentric, this article will guide you through the M&A integration process and help determine the best-fit M&A structure for your future transactions.
What are mergers and acquisitions?
A merger occurs when two companies form a new legal entity under a unified corporate brand. Businesses leverage mergers to increase their market power.
An acquisition takes place when one company purchases another company, not always voluntarily. Businesses leverage acquisitions to scale up, access new technology, operate larger market share, and cut competition.
Beyond these straightforward definitions, the crucial question is why businesses pursue M&A strategies.
As a growth strategy, M&As best suit businesses about to expand into new markets, gain a competitive edge and leverage new technologies.
Most often, businesses opt for mergers and acquisitions to
- Enter a new market
- Grab a new product line
- Gain intellectual property
- Enhance credibility
- Benefit from skillsets and must-have qualifications
- Profit through a long-term value
- Share distribution channels, production facilities, and human resources.
Types of mergers
Depending on their M&A strategic goals, businesses opt for the most relevant merger types. M&A structure for the transaction also depends on expansion goals and workplace culture, among other vital preconditions.
Horizontal mergers
Horizontal M&A stands for the synergy of two or more companies involved within the same industry. Most often, horizontal mergers, also known as horizontal acquisitions, occur to displace direct competitors.
A horizontal merger or acquisition is a win-win choice for businesses looking to:
- Attain economies of scale
- Boost market presence
- Cut competition
- Decrease costs per unit
- Grow the customer base
- Reduce operating costs
- Share fixed overheads.
A strategic benefit of horizontal acquisition is gaining market share through consolidation. The increased value of the joint entity should result in higher bargaining power and better competitive standing. The Facebook case highlights the importance of maintaining leadership through horizontal acquisition.
The 2012-2014 merger of Facebook, Whatsapp, and Instagram exemplifies horizontal acquisition. In the capacity of the acquiring company, Facebook targeted Instagram and WhatsApp to cut competition. Today, Instagram and WhatsApp operate as individual brands under Meta.
The 1999 Exxon and Mobil merger synergized two companies with an identical output capacity. Eventually, ExxonMobil led the oil and gas industry.
The major threat underway is that horizontal mergers potentially lead to market monopolization with few main players dominating the industry. This implies adverse implications, like fixed prices, lack of innovation, and lower-quality products.
Horizontal mergers are also featured by intense regulatory scrutiny. Consequently, the merged company may lose value if it fails to complete post-merger integration.
Vertical M&As
Once a business intends to integrate with suppliers or wholesalers, it will streamline its operations and create new efficiencies through a vertical merger.
A vertical merger results in an integrated entity comprised of two or more companies operating at different stages of the production cycle. Vertically merged companies may also have different supply chain statuses: retailers vs. wholesalers.
Vertical integrations help businesses create value by:
- Enhancing shareholder returns
- Creating a competitive value proposition
- Cutting costs
- Expanding distribution channels.
- Propelling production process
Vertical acquisition assumes that the acquiring company gains control over a target company. Retailers are acquiring wholesalers or factories to soothe competition from suppliers. The same concerns the competition presented by industry knowledge, including information about a particular business, its core processes, facilities, products, and services. The acquired company may operate as a brand, though under the ownership and control of the acquiring business.
In business models practice, vertical transactions come as acquisitions where a larger company acquires its partner or supplier, i.e., eBay and PayPal 2002 merger, to gain greater control over the value chain.
Another example is Iceland’s 2012 acquisition of Loxton Foods. The purchaser gained control of its partnering producer to establish in-house food production.
On the downside, vertical M&As entail market monopolization. A retailer’s corporate culture may not comply with the standards practiced by the manufacturer. Few businesses are capable of maintaining a factory and sustaining its workforce. Vertical M&As reduce flexibility and complicated management.
Conglomerate M&As
A conglomerate merger features the unification of two companies from polar niches with different business activities.
The major benefits of conglomerate mergers are:
- Business growth
- Market share increases
- Diversification beyond core industry and customer base
| Conglomerate M&As | Description |
| Pure conglomerate M&A | The two companies operate independently within their markets to diversify and mitigate risks. Unified, though operating in different industries, combining companies partner on no-overlapping terms, free of buyer-seller relationships or joint supply chains. |
| Mixed conglomerate M&A | Enable companies to expand product and market reach. To diversify and leverage potential synergies, the merged companies from different industries may overlap in distribution channels, technologies, digital content distribution, or customer base. |
Internationally renowned conglomerates like GlaxoSmithKline, Nestle, and Proctor & Gamble have evolved as diverse product and service lines in response to consumption trends. These large players are practicing bolt-on acquisitions across diverse industries and geographies.
In the 1970s-80s, Pepsi acquired Wendy’s, Burger King, and Pizza Hut. These conglomerate mergers aligned fast foods and drinks in response to consumer demand.
Amazon’s acquisition of Whole Foods Market in 2017 expanded its grocery sector with access to a wide pool of physical stores. The international expansion of Whole Foods Market embraced more than 530 stores across the United States, United Kingdom, and Canada.
The major challenges from the studied cases of conglomerate acquisitions and mergers indicate cultural clashes and employee attrition. Disrupted business operations proved inefficient and unprofitable whenever dissimilar companies integrated, like Mars & Wrigley’s 2008 merger.
Concentric M&As
Concentric “congeneric” are product extension mergers aimed to integrate two or more companies that operate within the same sector with overlapping technologies, R&D, and core processes. The integrated companies may appear as indirect competitors like Exxon and Mobil, operating complementary products, sharing similar distribution channels, and targeting the same customer base.
Integrated companies leverage concentric M&As to:
- Achieve economies of scale
- Attain new technologies or products
- Broaden product portfolio
- Increase market share
- Enhance operational efficiencies
- Expand customer base
- Expand product lines
- Widen R&D capabilities
- Reduce costs
- Share operational efficiencies.
Concentric acquisition is opposite to horizontal acquisition. The two companies, serving the same market, integrate with different product lines. The overlap creates synergies. Product extension mergers generate value through revenue synergies and cross-sales.
The 2012 product extension merger between Xstrata miners and Glencore commodity traders intended to establish a ‘natural resources group’ to trade mined commodities.
The 2015 Heinz and Kraft merger resulted in the Kraft Heinz Company, the record concentric merger. Kraft pursued revenue and profits by entering overseas markets. They also wanted to save on human capital. Yet, in 2019, the merger became a disaster after SEC investigations and billions in losses.
The downside of concentric M&As is that the similarities between integrated companies restrict their diversification potential.
Market-extension M&As
A market-extension acquisition comes as an extension of a horizontal acquisition. The purpose is to consolidate two or more companies across different geographic locations. Market extension mergers are the most common in the food and banking sectors.
Market-extension mergers expand market reach and create value through revenue, technology, and cost synergies. Owing to high levels of consolidation, new companies undertake acquisitions rather than enter overseas markets on their own.
The 2022 merger between Wight Shipyard (UK) and OCEA (France) featured an all-share merger that allowed the partners to access the mutual markets and double in size.
Types of acquisitions
Strategic acquisition
The strategic acquisition is the case when the resources and revenue of the joint entity outnumber the market potential of two separate companies. Strategic acquisitions occur when companies want to expand their customer base or boost brand recognition.
In the pursuit of long-term value, strategic buyers implement successful mergers by offering a premium price above the market value of the target company to complete a merger deal.
A solid acquisition strategy assumes
- Financial security
- Fewer risks for business growth and market outreach
- Smooth integration.
TLDR, the regional boutique fitness chain, performed commercial due diligence to increase its deal success by 25% and improve the financial operations of the acquired entities.
Financial acquisition
The financial acquisition provides a proper way to acquire a company or its assets through cash payments, equity, or debt. While financial acquisition assumes multiple ways of raising capital to acquire another business, the success depends on agile due diligence to
- Establish a long-term strategic vision
- Assess financial potential
- Integrate the acquisition.
In 2009, the Roche CFO acquired Genentech with an innovative financing approach exceeding USD 40 billion on the backdrop of the then freely falling equity markets.
Reverse acquisition
A reverse acquisition occurs between the legal acquirer and the legal subsidiary to help private entities fast-track an IPO. In this pursuit, the private company lets a smaller, publicly traded company acquire its equity interests. The listed entity performs the acquisition by issuing shares to the private operating entity’s shareholders.
Once the shares are exchanged, the private entity’s former shareholders represent the majority of the voting rights and appoint the majority of board members within the merged entity. The listed entity is identified as the accounting acquiree, whereas the shareholders of the former private entity take control over the synergized entity.
Reverse takeovers, or ´SPAC´ deals, have spiked recently, allowing private investors to skip the costly IPO process.
Nonetheless, reverse mergers entail tough regulatory scrutiny, operational issues, ownership claims from the target company’s shareholders, and culture clashes.
Burger King & Justice Holdings Limited made one of the biggest international reverse mergers in 2012, resulting in Burger King Worldwide.
Management buyouts
Management buyout (MBO) entails a financial transaction where the corporate management representatives acquire business from the stakeholders. Management members executing MBOs buy out business ownership with all the liabilities, hoping to expand and gain greater rewards in the future.
While the exit environment is due to improve, more management buyouts of private equity companies are expected in 2025.
Choosing the right M&A type for your business
Factors influencing the choice of merger or acquisition type
- M&A strategic goals
- Financial health
- Market conditions
- Company size
- Ownership structure
- Organizational culture
- Expansion potential.
Actionable advice for business owners pursuing M&As
First, business owners should objectively assess the M&A landscape, including current trends, market conditions, and regulatory shifts. Among others, these cornerstone preconditions determine the optimal momentum for future transactions.
Market consolidation and technological innovation have recently heated M&A deals across industrial manufacturing, healthcare, and high-tech sectors.
Our best advice before starting the M&A process is to:
- Prepare for an M&A transaction with the due diligence questionnaire
- Evaluate the target company
- Prioritize a well-structured deal
- Appraise strategic goals, financial health, and operational capabilities
- Detect areas of improvement
- Employ competent advisors
- Develop a comprehensive M&A strategy
- Develop a detailed transaction plan
Beyond the selection of the right M&A type, it is vital to explore the target company for their
- Client base expansion
- Economies of scale
- Market access
- Market share potential
- Diversification of products and services
- Shareholder value
- Supply chains
Using a virtual data room for M&A
Virtual data rooms (VDRs) ease the M&A process. M&A-designed VDRs allow stakeholders to collaborate seamlessly throughout the deal.
M&A transactions are complicated with vast amounts of processed data. To soothe the workload, VDRs enable M&A participants to work more efficiently and generate deal value.
These secure environments enable requesting, sharing, managing, and storing all the sensitive information. Transparency and improved communication enable cross-border interaction without limits.
ISO 27081-compliant M&A virtual data rooms allow users to:
- Protect data from third-party access
- Store documents safely
- Speed up due diligence
- Organize and analyze files
- Streamline workflows
- Enable a two-way flow of information between the parties
- Assume a centralized data hub
- Eliminate bulk dragging, document dropping, duplicate requests, and redundant work
- Mitigate sensitive data risks
- Deploy AI-based solutions
- Adapt changes during M&A due diligence
- Curtail hazardous deal distractions
The best choice of M&A virtual rooms depends on
- Scrutinized VDR security
- Solid encryption
- Ease of use
- Affordable flat-rate cost
- Advanced project management features
- In-built messaging system.
Conclusion
Opting for the right M&A type will help you match the win-win momentum in today’s shifting business landscape.
Our new M&A article outlined key strategic approaches to M&A preparation and choosing the most appropriate types of mergers and acquisitions.
M&As assume complex procedures accompanied by robust due diligence. To mitigate risks and save costs, we advise stakeholders to undergo a thorough preparation before the M&A deal.
Multiple types of mergers and acquisitions will help you stay informed and prepared for new strategic decisions.
Get more insights with our Customized M&A Due Diligence Checklist
FAQ
What is the difference between mergers and acquisitions?
While a merger integrates two companies under a shared brand to increase market power, an acquisition assumes purchasing another company to scale up and cut competition.
What are the key benefits of M&A?
M&As present businesses with wider opportunities to access new markets, diversify their product portfolios, and gain synergies.
What are common challenges in M&A deals?
M&A deals require meticulous preparation through the due diligence process of the target company. These complex business transactions may turn costly and risky whenever a company tries to skip M&A due diligence.
How do you choose between different types of M&A?
The choice is purely individual for every business organization, depending on its structure, ownership, management, financial health, strategic development goals, and growth potential.