In corporate finance, acquisitions and mergers are typically growth strategies that are supposed to strengthen a company, make it more cost-efficient, and competitive. While the primary importance of mergers and acquisitions is to boost profitability, the two strategies are entirely different. An acquisition typically implies that a larger firm buys more than half of a smaller company’s ownership and consequently allowing the more prominent firm to oversee or manage the smaller company directly. On the other hand, a merger involves the joining of two companies which then work towards a set of similar goals and interests.
Acquisitions and mergers are usually categorized based on the nature of the alliance. A majority of mergers are generally accomplished when one company takes over the other, but there are typically various reasons behind such a decision. The process of a merger or acquisition often called for a disciplined approach by the persons tasked with making this decision. Three critical aspects must be taken into account:
- A company should be willing to take the risk and make an investment early on to fully benefit from a merger, the competitors, and the industry at large.
- To minimize and at the same time diversify risks, multiple bets need to be made because some initiatives will be fruitful while others will fail.
- The entire management of the acquiring firm should learn to be patient, resilient, and able to accept change because of the evolving business dynamics in the modern-day world. Let’s take a look at the four main types of mergers and acquisition.
A horizontal merger usually occurs when a firm takes over or merges with another firm that offers similar or the same services and product lines to the final consumers, which implies that it’s in the same industrial niche as well as the same production stage. In most cases, such companies are usually direct competitors. For instance, if a company that deals with the production of mobile handsets merges with another in the market that also produces mobile handsets, it would be regarded as a horizontal merger. The advantage of this type of incorporation is that it gets rid of the competition, which aids a company in increasing its current revenue, profit, and market share. Besides, it also provides economies of scale because of the increase in the increase in size as the average costs reduce because of a higher production volume. Such mergers also greatly encourage cost efficiency because wasteful and redundant activities are eliminated from operations. For instance, the merging of two companies could eradicate multiple administrative departments or other departments like marketing, purchasing, and advertising.
Vertical mergers are done with the aim of combining two firms which are in a similar value chain of producing similar goods and services, with the only difference being the stage of production at which both companies are operating. For instance, if an online clothing store took over a textile factory, it would be regarded as a vertical merger because the industry is the same, that is clothing, but the production stage is different: one company is working in the secondary sector while the other is working in the territory sector. In most cases, such mergers are usually done to secure the supply of vital goods as well as avoid disruption of supply. Using our example, for instance, the clothing store would be guaranteed that it will always be supplied with clothes from the textile factory. This kind of merger is also done in order to limit supply to competing companies, thus a more significant market share and eventually more revenue and profit. Additionally, vertical mergers tend to allow for cost saving and a more substantial profit margin because the manufacturer’s share will no longer be available.
A concentric merger usually happens between companies which serve similar customers in a specific industry, but do not offer related services and products. They could deal with complementary products, products that go together but technically dissimilar. An excellent example of a concentric merger would be when a company which produces DVDs merges with one that produces DVD players because DVDs and DVD players are complementary products since a DVD cannot be used without a DVD player.
These mergers are usually done to facilitate the customer market because it would be easier to sell all these products together. Besides, this move would help a company diversify thus higher profits. It is also worth noting that selling one of these products would encourage the sale of its complementary product, therefore more revenue for the company if it is able to increase the sale of one of the products it sells. This would make it possible for a business to provide one-stop shopping hence increase convenience for customers. In such a case, the two companies are associated in a way because they will probably have the necessary technology, production process or business markets in common. This could also include the extension of specific production lines.
Such mergers often provide businesses with the opportunity to venture into different areas of the industry to minimize risks and provide access to markets and resources that were previously unavailable.
When two companies that are operating in entirely different industries, irrespective of the stage of production, come together to form a merger, it is known as a conglomerate merger. While this kind of alliance is not common, it usually is done with a move to diversify into different industries, which could aid in reducing risks.
There are usually different reasons why one company might decide to acquire or merge with another company, although there needs to be a strategic logic or reasoning behind the move. Most of the successful acquisitions and mergers with http://www.auctusgroupinc.com usually have a specific, well-outlined logic behind the massive corporate move. Also, mergers are generally highly complex and often need authorization from central government organizations such as competition commissions. Mergers and acquisitions often create value for a company through:
- Improving the new company’s overall performance
- Eliminating the excess capacity
- Acquiring skills and technology for the company
- Accelerating the growth of the company
- Encourage competitive behavior