Even if you haven’t heard about M&A until now, you definitely heard about companies being “acquired” by their bigger competitors or companies joining forces to dominate markets and increase customers.
From the outside, this always sounds like some shady business tactic where one company “wins” and the other one “loses”. While that might be the case in some very specific situations, you should know that there’s more to M&A.
Actually, M&A is an extremely powerful growth tactic for businesses at both ends. M&A is not only about acquiring companies but also about creating synergy by understanding the value and impact that such a relationship can bring to both businesses. And even if it is about acquiring, it’s not just the bigger company that “wins” – being acquired is one of the most sought-after exit strategies for entrepreneurs and companies of all sizes.
Keep on reading to find out exactly:
- Why there’s more options than just Mergers and Acquisitions (even though people keep referring to them as M&A)
- Why companies choose this tactic over others and what are the options for companies (both big and small) to expand markets, client bases, talent pool, technologies and many other benefits.
If you are already familiar with M&A’s and you think it can benefit the growth of your business, let’s talk.Contact us
M&A meaning and simple definitions
M&A is a general term that encompasses multiple business activities where ownership of companies or assets is consolidated through different types of financial transactions. We will keep the definition broad because M&A is not just about M(mergers) and A(acquisitions) but these other financial transactions too. Some of the most common ones are:
Mergers – When two companies of similar sizes are combined to form a new entity after mutual agreement and understanding of how this benefits them both.
Acquisitions – When a bigger company buys the majority of stocks and assets of a smaller company which will get absorbed into the business of the first one.
Consolidations – When two businesses combine under a different new entity with a different structure than those of the previous companies.
Tender offer/Stock sale – When an investor or company buys shares directly from the shareholders of a company, for a different price than the market one.
Asset sale – When a company is purchasing the assets of a business instead of it’s shares.
Management acquisition – When the company executives buy the assets and operations of their own company to make it private.
Mergers and Acquisitions – What is the difference?
Mergers and Acquisitions are often spoken about interchangeably because they serve similar purposes and both result in the consolidation of assets under one entity. Even though some think that companies are being absorbed in acquisitions but not in mergers that is not entirely true – sometimes mergers might result in one single brand because of marketing and communication reasons. There are, although, three main differences.
The first difference is simply the size of the companies – When the companies involved are of the same size, they merge and when a bigger company wants to work with a small one, that would be an acquisition.
The second difference is from a legal perspective – A merger is the legal consolidation of two entities into one while the acquisition is one entity taking ownership of the other’s share capital, equity interests or assets. For mergers, each party’s shareholders have partial ownership over the new shared enterprise while for acquisitions one business is placed under the ownership of the others’ shareholders.
The third difference comes from their nature – Because mergers take place between companies of similar sizes that understand the value of the merger, they have a more friendly nature. Acquisitions can also be mutually agreed but they can also be hostile, when the smaller company is not better off under the big one and the board does not approve the acquisition. This happens because shares can be bought directly from shareholders without the approval of management or the board of directors.
Why do companies enter Mergers, Acquisitions or other similar transactions?
Companies acquire or merge with other companies as a growth tactic that is defined by each business’s chosen strategy. They all happen for various reasons which can all be categorized as Synergy – the understanding that value can be increased by combining capabilities, assets and talent.
Each type of M&A is used for certain reasons and business goals and these should be chosen accordingly. Below we’ll show you the most common reasons behind Mergers and Acquisitions.
- Access to a larger talent pool
- Access to assets and other capabilities
- Business growth enhancement
- Entering new markets
- Expanding market share
- Expanding customer base
- Product/service diversification
- Reducing costs
- Gaining competitive advantage
- Economies of scale
- Geographic expansion
The 7 most common types of M&A
1. Vertical M&A
Vertical mergers take place between companies that exist at different levels of the same supply chain. They are usually of the same size and provide similar goods or services or ones that are related to each other. Companies enter into Vertical M&A’s to gain control over a bigger portion of the supply chain and to create synergy that will eventually allow them to facilitate growth for both companies by pooling together their assets and capabilities.
Example of vertical M&A: In 2006, Walt Disney acquired Pixar to improve the quality of their films and productions. Walt Disney was a media company that benefited from the talent of Pixar, which was just an animation studio but it had enormous potential.
2. Horizontal M&A
Similar to Vertical ones, Horizontal M&A’s take place between companies which are direct competitors or with very similar offerings. Companies, especially those in industries that have fewer offerings of the same product choose this type of M&A for higher potential gains and less competition.
Example of horizontal M&A: In 2020, Pepsi Co. wanted to acquire Rockstar to enter the energy drink market and also to compete with Coca Cola.
3. Congeneric M&A
Congeneric M&A’s take place between companies with different products or services but from the same industry. They usually share markets, technologies, or processes. Companies usually enter Conngeneric M&A’s to access each other’s markets.
Example of Congeneric M&A: A famous example from 1998 is the congeneric merger that resulted in CitiGroup – one of the largest banks in the world. The merger took place between CitiCorp, a commercial bank and Travelers Group – a financial service companies.
4. Conglomerate M&A
Conglomerate M&A’s happen between companies in markets that are unrelated at first sight but want to diversify their offerings for various reasons. Companies enter into conglomerate M&A’s to diversify their assets and stock portfolio as well as their product offering or the opportunity to cross-sell each other’s products.
Example of Conglomerate M&A: An example of Conglomerate M&A comes from eBay which acquired PayPal in 2002. Although in different markets and industries, eBay saw an opportunity in integrating PayPal’s service in their platform.
5. Market Extension M&A
Market Extension M&A’s take place between companies that sell the same or very simliar products or services in different markets. These Market Extension M&A’s are chosen by companies who want to enter new markets and to increase their market share and clients.
Example of Market Extension M&A: This type of M&A allowed a Canadian bank to dominate the Northern-American market by acquiring the assets of Eagle Banchsares Inc. which translated in over 1 billion dollars and almost 100.000 accounts at the time.
6. Product Extension M&A
Product Extension M&A’s take place between companies that sell different products in the same market. The companies that enter Product Extension M&A’s do it to group together products, technologies, expertise and knowledge in order to improve their offering and even to reach a bigger customer base.
Example of Product Extension M&A: A famous example goes all the way to 1977, when Pepsi co. Acquired Pizza Hut after understanding the relationship between their two products and the possibility to reach an even bigger consumer base.
M&A can be a great growth tactic for some businesses and it can mean the end for others. But one thing remains – if you have a clear strategy for your company and you know exactly what goals you want to achieve you must at least take it into consideration and see if it’s suited for you. Usually, M&A’s are used not only to achieve business goals but to achieve them faster and better and with less resources or capital.
As you’ve seen, it’s not just absorbing business, it’s more than that – it’s about fruitful partnerships that can benefit everyone involved in the long term.
If you think that M&A is the right tactic for you or if you want to find out more about how we can create synergy together, let’s have a talk.Contact us