Types of Mergers and Acquisitions

types of mergers and acquistions

“Coming together is a beginning; keeping together is progress; working together is success.”

-Henry Ford

When major corporations decide to combine, the potential benefits are significant. Mergers and acquisitions (or “M&As”) enable companies to increase their profits, acquire competitive talent and gain a considerable edge in the marketplace. For anyone seeking to join the world of big business, understanding M&As can be an important competency for success.

 

What Are Mergers and Acquisitions?

Although mergers and acquisitions are technically different concepts, they are often referred to together. The term mergers and acquisitions  refers to the practice of transferring control and ownership of one business to another, Harvard Law School explains. The difference between the two concepts lies in the way in which this transfer of control occurs. In a merger, two companies are involved in mutual negotiations regarding the terms of the handover. In an acquisition, negotiations may not necessarily take place. Instead, one company may simply dissolve the other or else retain the acquired company’s form but overtake its operations.

For reference, these terms are similar but not identical to the concept of “restructuring,” which refers to “a deliberate, significant and unusual alteration in the organization and operations of a business, commonly in times of financial or operational distress, typically accompanied by changes in ownership or finance.” While M&As and restructuring can often occur together, the latter is considered a more significant and disruptive process that is not part of normal business operations.

Because so many assets transfer within the process, M&As have become an important part of strategic management planning. Such transferred assets may include accessing new customer bases and distribution channels, opening operations in new geographic areas and obtaining talented employees. When a company acquires these resources, it increases the likelihood of its long-term viability in the marketplace.

 

Types of Mergers and Acquisitions

types of mergers and acquisitions

There are  four general types of M&As according to Cleverism:

  • Horizontal mergers occur when a company merges or acquires another that offers the same or similar products to their final customers. Companies involved in this process are usually direct competitors, as they are in the same industry and involved in the same stage of production.
  • Vertical mergers happen when two companies that work with the same product or service at different stages of production come together (for example, a clothing store and a textile factory). These kinds of mergers are often done for the purpose of restricting supplies to competitors, thus enabling the newly merged companies to increase their market share, revenue and profits.
  • In concentric mergers, companies that serve different products to the same customers in the same industry come together. (For example, a company that produces DVDs may merge with or acquire a company that produces DVD players.) Concentric mergers allow the companies involved to diversify, increase their profits and offer new opportunities for their business while reducing financial risk.
  • Conglomerate mergers occur when two companies that operate in completely different industries come together. (General Electric is a classic example. Currently, GE works in areas as diverse as aviation, health care, lighting and industrial finance.) Usually, the purpose of this action is to diversify into other industries, thus also reducing risk.

Although M&As are common, they aren’t always successful. (The mergers of Sears with Kmart and AOL with Time Warner are both cases in point. Both pairings lost vast amounts of money and have since been ridiculed in industry media.) These failures are usually due to mismanagement, extreme cost cutting and the clashing of company cultures.

Because of the numerous ways M&As can form, the marketplace is always vulnerable to corporate wrongdoing. Laws and governance, therefore, are an important part of navigating these partnerships successfully.

 

Law and Governance of M&As

While M&As provide significant opportunities for their owners to profit, they also have potential to cause substantial harm to markets, other companies, and consumers if remained unchecked. For this reason, they are subject to a significant number of laws and regulations.

Harvard Law School defines six core goals of M&A regulations:

  • To clarify authority and control over M&As by corporate decision-makers
  • To reduce transaction costs and overcome collective action problems
  • To constrain and improve outcomes of conflict-of-interest transactions
  • To protect dispersed owners of public companies
  • To deter or mitigate looting, asset-stripping and excessive M&A-related leverage
  • To come with the side effects of other regulations

Laws and regulations regarding M&As exist at both the federal and state levels; they are collectively known as antitrust laws. According to the Federal Trade Commission (FTC), the United States has three major pieces of federal antitrust regulation.

  • The Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade” as well as “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Clear violations of this act include incidents of price fixing or rigging bids.
  • The Federal Trade Commission Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” While the Sherman Act and FTC Act may cover the same types of crimes, the latter is used to prohibit practices that may not be formally prohibited by the former.
  • The Clayton Act “addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies).” Among its requirements is the statute requiring all companies planning large M&As to notify the government of their plans in advance.

State antitrust laws vary, although many are modeled on the federal example. Certain industries (such as insurance, airlines and banks) are also subject to additional regulatory measures.

For the purposes of transparency and accountability, the U.S. Securities and Exchange Commission offers the EDGAR database, a tool that allows the public free access to corporate financial and operations information. The database can help those interested in learning more about M&As and other business topics to find information such as compensation of executives, insider transactions, business combinations, initial public offering and bankruptcy filings, and more.

Advanced Studies in Business

No matter the particulars, M&As represent a major turning point in the operational landscape of a company. Those wishing to gain a greater understanding of advanced business concepts can benefit from programs like the online Master in Business Administration from Point Park University. The program is designed to expand students’ knowledge of critical business skills and ready them for real-world achievement. Students can choose to specialize with the management concentration or international business concentration.

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