What are the different types of acquisitions? There are various types of acquisitions and many ways to capitalize on them.
One of the more notable acquisitions is when Facebook bought Whatsapp for $22 billion – one of the largest acquisitions for software companies in history.
As I explain in my book, Selling Your Startup, acquisitions are an effective tool to manage competition and reshape the global corporate landscape.
There are many advantages and disadvantages that have been seen from mergers and acquisitions. These include giving companies access to markets, talents, resources, products, or technology.
Generally, acquisitions are corporate transactions in which companies buy substantial positions in or the whole of a company’s shares or assets.
The objective is to control, get a percentage of the profits, build on, and synergize to take advantage of a market.
There are actually a wide variety of reasons and even types of mergers and acquisitions. They can lead to a variety of different outcomes.
It is important to know them to understand incoming offers, potential exits, and how to optimize the growth of your startup.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. Differences Between Mergers and Acquisitions
- 2. What Happens in an Acquisition?
- 3. 7 Types of Acquisitions
- 4. Horizontal Acquisitions
- 5. Vertical Acquisitions
- 6. Congeneric Acquisition
- 7. Conglomerate Acquisitions
- 8. Market Extension Acquisition
- 9. Reverse Takeover
- 10. Acquihire
- 11. In Conclusion
Differences Between Mergers and Acquisitions
The terms ‘acquisitions’ and ‘mergers’ are often used interchangeably. Although they appear similar on the surface, there are a few major differences that you can use to tell them apart.
Mergers typically combine two companies into one or consolidate into a new one with a new legal business entity.
Mergers often happen when the management deems it fit that the consolidation of two firms can result in more profits. Or, more significant market share, save of cost, or any other strategic reasons.
These corporate transactions are voluntary, in essence, they increase each company’s power – as a new entity is formed.
Mergers are not necessarily as common as acquisitions, as integrating two companies is difficult. You have to combine company executives and shareholders to pull resources into a single company.
There is also a possibility of losing autonomy when you merge resources to dominate a particular market.
Whenever a merger occurs, the merging companies’ stocks have to be restructured and new stocks issued for the newly formed company.
Mergers are often performed to reduce operational costs, boost revenue, expand the market share or boost profits. Though also to fend off larger competitors.
Mergers can be between similar companies, or in different geographic areas, or parts of the supply chain in an industry.
The most famous example of a merger is between Exxon and Mobil, the second-largest oil producers in the US reaching an agreement of $73.3 billion.
Around the same time, a merger between Hewlett-Packard and Compaq occurred to create HP-Compaq.
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What Happens in an Acquisition?
The company taking over the assets or operations may either make the acquired organization cease to exist or operate it as a subsidiary of the parent company.
An acquirer has the power to restructure the leadership and earn profits from their buyout.
Any company can buy out shares of another company even when they are not in a similar industry or field to leverage business advantages.
The relationships in the industry or reasons for buying out a firm generally constitute the different types of acquisitions.
It takes a lot of money to finalize an acquisition so that the takeover company has control over the operational management of the acquired company.
The buyer often has absolute power over the new company to do whatever they will with their new acquisition. Though in many cases, the target company retains its autonomy.
Make sure you know your legal paperwork to understand the obligations of each party.
Companies often perform acquisitions to guarantee better profits to streamline operations. Or get a bigger market share by improving economies of scale and lowering cost per unit production.
This is easily done since the buyer technically owns patents and new technologies.
It is often an opportunity to get new technology or buy an undervalued company before its potential is maximized. And to grow the buying companies’ portfolio of assets.
Amalgamation is the joining of two or more organizations into a new entity by combining the liabilities and assets of both entities into one.
The stronger transferee organization absorbs the transferor business, which then leads to an entity with a stronger customer base and more assets.
Due to the hostile nature of some acquisitions and the overlap, experts construe the same words to mean the same over time. This way, they paint a positive picture of hostile takeovers.
7 Types of Acquisitions
The relationship between the firm taking over, and its main reason for them classifies acquisitions. The different types of acquisitions are:
Horizontal acquisitions mainly capitalize on the market power in the same industry in the same market at the same production stage.
This type of takeover helps to consolidate the market power. They can do this by ensuring companies that are thriving at the same stage of market production capacity and serve the same market integrate through a merger.
In simple terms horizontal takeover is the purchase of a direct competitor.
After the acquisition, the acquirer can expand the production of its products and expand the capacity of the acquirer. At the same time, it can let both companies keep operating the same business.
A good example is Disney Acquisition of Marvel Studios and Pixar which both continue to produce superhero films and animation films, respectively.
Despite the two being direct competitors in some senses.
A vertical acquisition is when a business buys another business in a different chain of production either through forward integration or backward integration.
Backward integration is when a company buys another company that produces its raw materials. Whereas forward integration is where a company buys its businesses ahead of its value chain.
In forward integration, a company may buy its direct distributor. Both methods are effective to synergize and reduce the cost of production and sales and integrate different stages.
A good example of vertical integration is Sony, which acquired its raw material suppliers such as the Toshiba chip plant. This deal allowed them better backward integration.
At the same time, they acquired Columbia Pictures who produces movies to sell more BluRay discs. There are many other acquisitions that have transformed Sony into a large media conglomerate rather than a tech firm.
Another great example is Google’s acquisition of Android, where Android handles the development of Android’s system. But, in turn, pushes Google search engine and other Google products in Android devices.
A congeneric acquisition is one of the different types of acquisitions. During the congeneric acquisition, the acquirer is in a related industry. Or has shares in the same market but does not offer the same product as the acquirer.
In the acquisition, the buyer may share similar distribution channels and may really help synergize by letting the two companies work together.
The aim of the congeneric merger is to make two firms a one-stop shop for related products.
When the takeover company gets the acquisition, it can grow its position better and even charge a higher premium for its services.
Most tech firms have mastered the art of congeneric acquisition to enable them to offer more products under one roof.
For example, Facebook acquired WhatsApp, a messaging software, and Instagram, a photo-sharing app, which has helped it boost its market share significantly.
Through Instagram integration with Facebook, one can advertise on similar the two platforms at a central point through the Facebook business.
On the other hand, Google has acquired YouTube that forces new users to sign up to a google account to fully enjoy functionalities like commenting. In this way, they can sell more products to the consumer.
These are types of takeovers that acquire businesses in totally unrelated industries, product lines, customer base business models, or different geography.
Since the two companies have nothing in common, the acquisition mainly diversifies the business, reduces risks, and reaches a new market.
In addition, such acquisitions help open markets to the buyer as they try to synergize resources in totally unrelated industries.
The acquisition of Whole Foods by Amazon was yet another example of a conglomerate acquisition where a large online retailer bought a large grocery store.
Their two business models are different, and the customer base is different, but at the end of the day, it helps to diversify risks for Amazon.
Market Extension Acquisition
Market extension Acquisitions closely resemble horizontal acquisitions with a slight difference. The acquisition happens on a company in a different market altogether.
The main aim of such acquisitions is to target new regions and expand market capitalizations. One example that explains it clearly is the acquisition of Eagle Bancshares Inc by the RBC Cantura.
A Canadian bank with a huge market in Canada that wanted to grow its market share in the US carried out the acquisition.
Eagle Bancshares has its headquarters in Atlanta, Georgia, and it has 90,000 accounts and assets worth $1.1 billion.
An essential factor that influences how mergers and acquisitions progress is the value of the company being acquired. If you would like more information about how to value a startup, check out this video I have created.
A reverse takeover is another of the different types of acquisitions. It is an acquisition tool that works to make a company public without the hassle of an IPO.
The process involves acquiring a private company from an existing public company. Or a private company buys off a public company through an asset swap or share issue.
The public company is typically a shell company where the investors acquire shares. The process often involves the shareholders of the private company acquiring majority shares of the shell company.
This company then merges with the acquirer. The shell company often trades stocks with the private company in exchange for shares to complete the deal.
The New York Stock Exchange used the route by acquiring Archipelago Holdings so that it could go public. One of the greatest investors, Warren Buffet, has also used the strategy in making Berkshire Hathaway.
The business world is challenging, and having the best skills can determine a company’s success. Firms have devised new methods to ensure that they constantly have the best hand working.
Acquihire Acquisition is an acquisition strategy where the acquirer’s primary goal is the bought firm’s talents, skill, and expertise. And, not on their product or market.
The most notable example of acquihire is when Facebook bought Drop.io and Hot Potato in New York to get their hands on the companies’ founders.
The trend is likely to persist with many firms with top skills tying down their employees with hard-to-break contracts.
The acquisition strategy is evolving, and firms are coming up with innovative ways to increase their dominance over the markets or bridge any gaps between them.
Some of the acquisitions, especially in tech, have ended up growing in value and achieving the acquiring company’s goal.
However, everything has not been rosy. Estimates indicate that at least 90% to 70% of all corporate acquisitions and mergers fail.
Firms have to learn to evaluate targets to ensure that the acquisition is profitable in the long term for the success of both organizations.
Organizations have to start looking at things, such as the company culture and its effects on the workforce. These factors could significantly influence the type of acquisition and their relative success in the future.
Some of the most successful acquisitions are by serial buyers looking to acquire many firms to get to the top.
There are many new types of acquisitions that firms are using to increase their competitive advantage. While there is also a concern of antitrust laws being breached, and monopolies growing.
Many firms have been involved in lawsuits for wiping out their competition through acquisitions. There is a thin line between acquisition and antitrust, through which firms must tread with caution.
However, acquisitions can be beneficial to the acquired firm by providing strategic and tangible advantages, while providing more resources to the acquired firm.
For this reason, every entrepreneur must understand the different types of acquisitions.
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