Six Types of Successful Acquisitions
October 2nd, 2019 (Updated 03/23/2021) | 5 min. read
By Tolu Oke
A common question in the business world is ‘what is the difference between a merger and an acquisition?’
A business acquisition is a complex process that involves a business acquiring another to increase its overall size, take over their client base and, in many cases, their staff. Business acquisitions allow for a business to bolster their strengths and reduce their weaknesses by growing the business in a much shorter timeline than organically possible.
A business merger is similar to an acquisition but typically results in a combination of the two businesses rather than an absorption. But what is a successful merger and acquisition and how will they affect your business? In this article, I will cover six types of successful acquisitions and mergers, the benefits and drawbacks that each offer as well as some information on how they can benefit your pricing strategies.
The Vertical Merger – To the Benefit of All
Vertical Mergers are the acquisition or merging of two businesses that fall within the same industry but work on different points of the production cycle. This form of merger aims to benefit both businesses by allowing both parties access to another vital stage of the production process. An example of this could involve an electronics retailer merging with an electronics manufacturer. The retailer now has a direct supply line with the manufacturer to their product range which will avoid any disruptions in supply and can now choose to become the sole supplier of their products, effectively blocking competitors from what may be a premium product. The manufacturer now has a constant demand from the retailer which they can supply continuously and no longer need to worry about being undercut by a cheaper or newer supplier. Vertical mergers greatly benefit pricing strategies as the pricing team then have access to two distinct sections of the supply chain and can modify both to the benefit of all.
Sale of Majority of Assets – The Complete Takeover
In a sale of majority of assets, one business buys out the majority of assets from the other. The sale of majority of assets is uniquely an acquisition method and cannot be applied as a merger. This effectively shifts the control of all assets to the buyer, placing them in a much higher position of power. The true benefit of the sale of majority of assets method is the near–immediate burst of growth that the purchasing business will acquire, something not typically possible through a conventional timeline. Where pricing is related, a sale of majority of assets now allows the buyer full and unrestricted access to the assets purchased, even more so than from a vertical merger. The pricing team of the purchasing business is now able to fully control and determine pricing strategies from the bottom up.
Stock for Stock – A Subsidiary
Stock for stock is like a sale of majority of assets with one key distinction. The business which is purchased, rather than being entirely absorbed within the buyer’s business, now becomes a subsidiary of the buyer. The main benefit of stock for stock lies in avoiding a potential crash from the mismanagement of a sudden acquisition of another business while maintaining the potential profits.
Horizontal Merger – Exponential Growth
A horizontal merger involves two companies, typically competitors, either merging or one acquiring the other, which are both in the same stage of the production process within the same industry. Horizontal mergers allow businesses to expand rapidly and to simultaneously remove a major competitor from the market. Whether a merger or an acquisition, the horizontal method results in exponential growth for both parties by increasing not only their assets but also their market share and control. Horizontal mergers are absolutely beneficial in relation to pricing as they allow for more control over the market itself as opposed to being restricted within one business.
Concentric Mergers – Industry Expansion
Concentric mergers are mergers or acquisitions in which the businesses involved are in the same industry but do not directly compete with their products or services. The benefits of a concentric merger are to expand their potential customer base by offering a wider range of products and services that complement their existing range. An example of a concentric merger would be a camera retailer absorbing a retailer of camera bags. This allows the resulting business to upsell their original products, the cameras, with camera bags, that complement their purchase, something which the customer would most likely look for elsewhere. A form of merger that typically increases customer satisfaction, the concentric merger can significantly increase revenue and allows a business to generate a larger market share. Pricing strategies benefit from concentric mergers as the pricing team can now work with another range of products and develop strategies on the sales of complementary products and services.
Conglomerate Mergers – Diversification in Services
A conglomerate merger is where, through an acquisition or merger, two businesses from different industries are joined together. The purpose of a conglomerate merger is to aid either the buyer or both businesses in expanding into another industry. In stark contrast to the other five mergers and acquisition types that I have listed in this article, a conglomerate merger doesn’t result in immediate expansion within the original industries but, over time, through the absorbing of another range of products and services, it can result in a much larger market share and profitability.