Acquiring or merging with another business can have several strategic benefits, such as reducing competition, expanding your company’s assets, creating synergies, serving more markets, and extending your customer base. When considering target businesses, there are many important factors to consider. The first step is to determine your company’s goals. For example, does it want to reduce risk through diversification, expand into new markets, reduce costs through enhanced efficiency, or secure its supply chain?
Types of M&A
Depending on an acquiring company’s objectives, it chooses among four main types of mergers and acquisitions (M&A): horizontal, vertical, conglomerate, or concentric.
Horizontal
Horizontal M&A involves two companies that operate within the same industry and offer similar products or services. This reduces competition and can also expand the offerings and customer base of the acquiring company. For example, if a company that produces canned soup buys a smaller producer of specialty organic soups, this horizontal acquisition not only eliminates a competitor but also expands the acquiring company’s reach to consumers who may not have previously considered buying their brand. By embracing a market segment that values sustainability, the acquiring company could also enjoy a boost to its brand image.
Horizontal M&A can empower a company to increase revenue while reducing costs with consolidated efforts and enhanced efficiency. Acquiring (or in the case of a merger, newly created) companies benefit from economies of scale and synergies across the business cycle, from marketing to delivery. However, it’s important for acquiring companies to perform careful due diligence to assess their targets to ensure the right fit and develop a clear picture of the costs and potential benefits of a deal.
Vertical
In a vertical merger or acquisition, the two companies operate at different parts of the value or production chain. An example of this would be if the soup company in the example above acquired a farming business that produces vegetables the company needs for its soups. In this way, the acquiring company gains greater control over its supply of essential goods. They could realize cost savings by producing these goods themselves while helping ensure an uninterrupted supply.
A vertically integrated company can expand the business and generate new revenues by selling essential goods to other producers. At the same time, it could gain the ability to limit the supply of these essential goods to its competitors, giving them a powerful advantage in the marketplace. A vertical integration could streamline operations, reduce costs, and enable synergistic collaborations across segments of the value chain.
Conglomerate
A conglomerate is formed when a company joins with another to diversify its offerings, branching out from its original core business. The target business might be completely unrelated to the acquiring one, sought in an effort to control risk through diversification. This is known as a pure conglomerate. Alternatively, in a mixed conglomerate, the acquiring company is seeking to extend its current markets and/or products.
Our soup company might decide to diversify by acquiring a garden supply company, or it could buy a company that makes crackers, allowing them to seamlessly cross-sell their products and helping them each gain a greater market share. The further a company digresses from its original business, however, the more resources must be spent learning the new industry. As this can require a substantial investment, it’s critical to account for such needs when assessing the total cost of an acquisition.
Concentric
A concentric merger or acquisition occurs between companies in the same industry with similar customer bases that offer different products. For example, the canned soup company might acquire a frozen foods company, allowing it to extend its products into the frozen food market. This can be similar to a mixed conglomerate, but conglomerates are more focused on diversification, while a concentric merger is more about creating synergies.
Important Considerations
Every merger and acquisition involves significant risk. Make sure to conduct a thorough assessment of potential targets and the specific risks associated with each. While each M&A is unique and it isn’t possible to create an exhaustive list, examples of important considerations include
- How your business models, strategies, and objectives align and where friction is likely to arise
- The valuation, market position, and growth potential of the target company
- The target company’s brand image and customer relationships
- Risks associated with the target company’s operations, including workplace and product safety and regulatory compliance
- The skills, qualifications, and knowledge of the target company’s current employees
- Cultural fit between your two companies
Antitrust Concerns
It’s important to get competent legal advice during the M&A process to avoid running afoul of antitrust law. The Federal Trade Commission has expressed the greatest concern over horizontal mergers specifically because of their tendency to reduce competition and the risk of creating monopolies. While vertical mergers raise fewer concerns, the ability to restrict competitors’ access to essential goods (or raise the price on those goods) as well as the potential for unfair collusion sometimes raises antitrust issues. Although conglomerates operate in different markets, antitrust concerns can arise from bundling practices, technologically tying products together, and other types of coordination that tend to tamp down incentives to innovate.
Horizon M&A Advisors work with public and private companies, private equity groups, and others to facilitate successful mergers and acquisitions. Our team of seasoned experts conduct thorough financial modeling and prepare in-depth confidential offering memorandums, saving our clients time and making the due diligence process easier. Learn more about how we serve buyers, or take a look at some of the transactions we’ve completed.
