When entering into strategic alliances, companies must understand the different types of mergers and their impact on business. Founders enter into an agreement or a business deal where two distinct and independent companies combine to create a single legal entity.
Typically, companies that are similar in size and power enter into mergers, unlike acquisitions, where one company assumes control of the other.
M&A deals are voluntary, and owners enter into mergers for various strategic reasons that will benefit both entities. These reasons may include capturing new markets, creating and selling a new product line, or offering a new service.
Well-planned mergers can also lead to more economical operational costs, lower tax liabilities, and attractive pricing structures for customers. More efficient management and any other positives to improve scale, revenues, and profits are other potential objectives of the merger.
Dealmakers also factor in a broader customer base, robust supply chains, and higher shareholder value. The business vertical where they work, internal work culture, and mission are other criteria for choosing the right companies for a merger.
Before planning a merger, owners typically identify the main factors that can influence a successful deal. They’ll work out the targeted companies for merging and the time frame within which the deal should be completed. They’ll also discuss the types of mergers and work out the appropriate model.
The Ultimate Guide To Pitch Decks
Types of Mergers – Horizontal
Horizontal mergers typically occur between companies operating within the same industry or space. This consolidation is between two or more competitors offering similar products and services.
For instance, a hypothetical merger between the beverage divisions of Coca-Cola and Pepsi. Sprint and T-Mobile are two telecommunications companies that entered into successful mergers.
The Exxon and Mobil merger is another high-profile example. The two giants combined to become the world’s largest oil and gas company at the time of the deal.
When two competitors come together, their objective is to grab bigger market shares and benefit from economies of scale. Integrating synergies and sharing key resources, R&D, and Intellectual Property for higher profits are also their goals.
The merged company also benefits from gaining a competitive advantage in the market and better bargaining power. Maintaining or acquiring the top leadership position in the industry, efficient distribution channels, shared production facilities, and human resources are other pros.
The biggest downside to horizontal mergers is that their combined size leads to diminished flexibility and agility. With just a few players dominating the vertical, there are issues with quality control and rigid pricing structures. A lack of motivation to innovate and develop new product designs can also become a problem.
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them
Vertical mergers typically occur between companies operating in the same industry but along the supply chain. Such companies are non-competing entities but make complementary products. Or complementary products along the same supply chain.
Vertically merging companies come together to produce product components or provide after-sales services for the product range. Increased synergies, cost reduction, higher quality control, and better flow of products and information along the supply relay are benefits.
These savings can ultimately transfer to customers, allowing companies to lower costs and capture more customers. That’s how they can develop an edge over the competition while enhancing profits and returns for shareholders.
Essentially, such mergers streamline the company’s production and distribution processes. Better control over the supply chain for enhanced efficiency and access to components are also the key objectives. Take, for example, retailers purchasing manufacturing units or wholesalers.
An automobile company merging with an auto parts unit to set up an in-house production division is another great example. On the downside, maintaining and running a separate factory and managing the workforce may involve compliance issues.
Typically, vertical mergers are rare, and larger companies are more likely to acquire smaller startups and service providers. That’s how they add value to their brands and gain better market visibility. A great example of these types of mergers is the UK’s frozen food retailer, Iceland acquiring Loxton Foods in 2012.
Conglomerate mergers occur between companies operating in two entirely unrelated commercial verticals or geographical regions. Cross-border M&A deals are great examples of such strategic alliances since two brands can diversify into other countries.
These types of mergers combine the operations of two distinct entities that are managed efficiently individually. They have the capabilities to scale and profit but merge to take advantage of a larger consolidated balance sheet.
Several criteria govern such mergers, such as the potential to create synergies and enhance shareholder wealth and value. Cost savings and better performance are only some of the advantages. Conglomerates can be of two kinds: pure and mixed.
Pure conglomerates are between companies that are entirely unrelated or work in different spheres. Mixed conglomerates are between companies wanting to add diverse products to their portfolio. Or looking to expand their operations to a broader customer base and market.
The most significant risk in these types of mergers is the pivot in business operations, which might not be successful. On the upside, conglomerates diversify out of their core industry or customer base and experience market and product extensions. On the downside, achieving integration can be more challenging.
The biggest barrier can be cultural differences between the two companies and management and employee attrition. Lack of alignment in business operations can result in profits and efficiency taking a hit.
If the product categories are too distinct, the merger may not be able to capture markets as expected. For instance, shoes and fast food.
Other real-world examples include companies like Burger King, Pizza Hut, and Wendy’s. These brands are now operating under the single brand name of Pepsico. Then there’s Meta, which now includes WhatsApp, Facebook, and Instagram. However, they are more acquisitions than strategic alliances. Within is its latest purchase.
Congeneric mergers are also termed product extension mergers or concentric mergers. These types of mergers occur between companies operating in the same sphere or sector. With product extension mergers, both companies may combine their product lines to offer customers a broader range.
Not only can the new company build a more robust market presence but also a bigger customer base. Congeneric mergers may also happen between companies from different industries, manufacturing similar or complementary products with a shared customer base.
Companies that work in the same sector but share resources can also enter into concentric mergers. These resources may include research and development facilities, marketing and advertising teams, production processes, technology, and Intellectual Property.
Strategic alliances like these enable lowered costs thanks to higher efficiency in using resources and running company operations. Companies can combine synergies to raise revenues and profits while capturing broader markets and economizing on human resources.
Risks are minimal since the merged company targets an established customer base and offers more products but at economical costs. One of the best examples of a congeneric merger is the one where Citicorp entered into an alliance with Travelers Group, a financial services company. This deal took place in 1998 and was valued at $70B.
Another great example would be an ice cream manufacturing company merging with a wafer or popsicle-making unit. In this way, they can enhance their product portfolio.
A Special Purpose Acquisition Company merger occurs between a publicly traded company and an operating company. These types of mergers take place when the SPAC raises capital using public markets. Next, it uses this capital to purchase the operating company, which also becomes publicly listed.
These types of mergers are typically beneficial for the targeted company. That’s because they can avoid the large expenses that typically accompany an IPO. Although such strategic alliances can come under the category of acquisitions, the ultimate objective is public listing.
A great example is US Airways merging with America West in 2015. Another example is Churchill Capital Corp IV merging with EV maker Lucid Motors in 2021. The deal is reported to have an IPO of $2.07 billion and is the largest SPAC deal of all time.
Keep in mind that in fundraising, acquisitions, or mergers, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Market Extension Mergers
Companies entering into a market extension merger look to gain access to broader markets and, thus, a broader customer base. Such companies produce similar products or services and are essentially competitors serving different markets. Cross-border M&A deals are again an excellent example.
The key advantage of these types of mergers is the potential for higher revenues and profits. The merged company can grow quickly to acquire new clients from both locations and pool resources. As a result, they can potentially diversify to more locations.
The merged company also stands to lower the external risk, improve its products, and add to its product portfolio. The possible relocation to newer locations is also a potential advantage.
For instance, an apparel manufacturing company serving a rural customer base merging with another apparel company serving an urban clientele. Larger mergers can be between companies attempting to capture markets across state lines or across the border. The US and Canada are great examples.
On the downside, the new company will need large infusions of capital and possibly end up incurring large debts. They’ll need funding to expand their production facilities, purchase equipment, hire a new workforce, and set up supply chains. A bigger organization also faces challenges with agility.
Multiple companies may enter into these types of mergers to expand their reach. Eventually, they set the stage to become global brands. Eagle Bancshares in Atlanta, Georgia, entering into a strategic alliance with RBC Centura, is another notable example.
Product Extension Mergers
Product extension mergers are also called cogeneric mergers and occur between companies selling complementary or related products and services. By combining operations, companies can access similar markets.
The merged company groups together products to reach a bigger customer base, maximize revenues, and raise profits. Pooling advertising, marketing, supply chains, and distribution channels helps lower costs.
An increased competitive advantage and efficient utilization of available resources are only some of the additional advantages. Enhanced customer satisfaction, brand recognition and loyalty, and lower customer attrition contribute to long-term success.
To go with the earlier example, PepsiCo entering into a strategic alliance with Pizza Hut is also a product extension merger. After the merger, the company raised its profits by more than $436 million.
An essential part of any merger or acquisition is knowing how to value your company. Check out this video where I explain how to do that.
Reverse mergers or reverse takeovers, as they are also called, are the opposite of SPAC mergers. In this case, a private company purchases and assumes control of a publicly traded company. Or a company that is listed on the New York Stock Exchange (NYSE). These types of mergers are also termed reverse Initial Public Offerings or IPOs.
Companies that wish to go public with an IPO can avoid the expensive and time-intensive procedures by simply merging. They’ll pick a company already listed on the stock exchange and thus restructure and strategize their market standing. In this way, they can stabilize the company during financial problems.
Aside from money and time, IPOs also cost companies in terms of regulatory and compliance hurdles that companies can avoid with reverse mergers. On the downside, they may need to conduct detailed due diligence to assess liabilities, risks, motivations, and benefits for stakeholders.
A good example of a reverse merger is Burger King, which initially released an IPO in 2006. 3G Capital later acquired the company and restructured it into a private company. That’s how it coped with the financial difficulties it faced.
Eventually, 3G Capital merged with British firm Justice Holdings Limited to form Burger King Worldwide, which again went public.
Acqu-hires are mergers that companies enter into with the objective of acquiring the highly-skilled talent they have. The key objective is merging Intellectual Property and the drivers behind these assets.
The technology sector sees the maximum of these types of mergers since the industry is facing a serious shortage of talented programmers. A great example of an acquihire is Facebook acquiring Drop.io with the objective of bringing its CEO, Sam Lessin, into the company.
Strategic alliances have the potential to bring significant benefits to the partnering companies. The different types of mergers depend on the core objectives and advantages companies seek from the partnership. Of course, profitability and scalability are always the key drivers.
You may find interesting as well our free library of business templates. There, you will find every single template you will need when building and scaling your business completely for free. See it here.