5 Types of Mergers and Acquisitions with Examples
To plan a successful M&A, dealmakers need to determine the three T’s: target company, timeline, and type of M&A. In this article, we focus on the most common types of mergers and acquisitions and what they look like in action:
- Reverse merger
Once you’ve determined the right M&A structure for your transaction, Deel can support you through key steps of the integration. Our experts have helped companies complete a variety of M&As in 30+ countries, and we’ve acquired five companies ourselves, including Legalpad, Roots, and PayGroup, a public company listed on the Australian Stock Exchange (ASX).
Mergers vs. acquisitions: What’s the difference?
The terms ‘merger’ and ‘acquisition’ refer to the unification of two or more companies, but they have different processes and outcomes.
Merger: Two or more companies—usually similar in power or size—voluntarily combine their assets to create a new business or legal entity.
Acquisition: One company gains control over a target company by purchasing the majority of its shares or assets (not always voluntarily). The acquired company usually ceases to exist as an independent business.
Most M&As are driven by one or more of the following factors:
- Client base expansion
- Fortified supply chains
- Access to different markets
- Diversification of new products or services
- Increased market share
- Higher shareholder value
- Improved economies of scale
Types of mergers and acquisitions
Your expansion goals, industry, workplace culture, and other factors will determine the right M&A structure for your transaction. Let’s take a look at the definition, advantages, disadvantages, and real-world examples of each.
A horizontal merger is the unification of two or more companies that operate in the same industry. The companies typically produce related products or provide similar services. Commonly, two or more smaller firms will complete a horizontal merger to create a larger, stronger business.
Through a horizontal merger, companies gain greater market share while reducing their immediate competition. These companies can also cut costs by utilizing economies of scale and sharing their skills and resources.
But the larger a company is, the less flexibility it has and the more scrutiny it must endure. In some markets, a horizontal merger can result in a monopoly, wherein a few players dominate an industry. Monopolies often result in price-fixing, low-quality products, and a lack of innovation.
Example of a horizontal merger/acquisition
The unification of Facebook, Whatsapp, and Instagram is an example of a horizontal merger/acquisition. The three social media platforms were combined under Facebook (now Meta) as part of Facebook’s expansion plan.
Facebook purchased Instagram in 2012 for $1 billion (USD) in a combination of cash and Facebook shares. Two years later, Facebook purchased Whatsapp for $16 billion. The purchase price comprised $4 billion in cash and $12 billion in Facebook shares, with an additional $3 billion in restricted stock units to Whatsapp founders and employees.
A vertical merger/acquisition occurs when two or more companies operating at different stages of the production process or supply chain merge. For example, a retailer acquiring a wholesaler.
Vertical integration can help companies increase synergies, reduce their costs, and gain more control of the supply chain as they gain more direct access to materials. Retailers often purchase wholesalers or production factories to cut off competitors from certain suppliers or industry knowledge.
One of the most significant disadvantages of vertical integration is the cost of maintaining a factory and employing its workers compliantly. Aligning company cultures across a retail company and a manufacturer or factory can also be a challenge in vertical integrations.
Example of a vertical merger/acquisition
In 2015, IKEA bought 83,000 acres of forestland in Romania to better control its forest operations and “secure long-term access to sustainably managed wood at affordable prices.”
In 2021, Ingka Investments, the owner of most IKEA stores, announced that it acquired 613,000 acres of forest land in the US (Georgia, South Carolina, Alabama, Texas, and Oklahoma) to protect forestland. This purchase supported their goal to become carbon neutral by 2030 and their commitment to responsible forest management.
The company purchased over 10,000 acres of property in southwest Georgia from The Conservation Fund. Ingka assumed all legally binding agreements, including obligations to protect the land from fragmentation, restore the longleaf pine forest, and safeguard habitats of priority species. The public still has access to the land.
A conglomerate merger is when two or more companies with unrelated business activities or markets merge. The companies often operate in entirely different industries and regions.
There are two types of conglomerate mergers: A pure conglomerate merger and a mixed conglomerate merger. In a pure conglomerate merger, the two merging companies have no overlapping interests and different products or services. In a mixed conglomerate merger, the two firms have different business operations but try to gain product or market extensions by merging.
Companies that complete a conglomerate merger often experience more growth and diversification outside their core industry or customer base. On the other hand, these company mergers can lead to possible culture clashes that result in employee attrition. In some cases, companies that complete these types of acquisitions become less efficient and profitable because their business operations aren’t focused.
Example of a conglomerate merger/acquisition
In 2017, Amazon acquired Whole Foods Market for $13.7 billion to learn about grocery business operations and get into brick-and-mortar stores through a grocery expansion. Culture clashes were reported after the merger, as Amazon’s changes allegedly negatively impacted employee experience and left customers angry over low stock.
Amazon has since grown its brick-and-mortar grocery operations. As of March 2023, there are 514 Whole Foods stores, 42 Amazon Fresh stores, and 29 Amazon Go stores, though some Fresh and Go stores are set to close this year.
A concentric merger is also known as a congeneric or product extension merger. This type of M&A occurs when two or more companies operating in the same market or sector with overlapping factors merge (such as technologies, research and development, or processes).
The merging companies typically develop similar products but in different industries. They likely have complementary products that appeal to the same customer base. During this integration, a product from one company is added to the existing product line of another company, and the companies become one under the product extension.
Through a concentric M&A, companies benefit from cost reductions as they share operational efficiencies and resources. They gain access to new consumer groups and grow their market share with minimized risk, as the merging companies already share similarities, but overall they typically experience limited diversification.
Example of a concentric merger/acquisition
The Heinz and Kraft merger became the largest concentric merger in history after investors 3G Capital and Berkshire Hathaway created The Kraft Heinz Company.
At the time of the merger, the company was the third-largest food and beverage company in North America and the fifth-largest globally. It was valued at approximately $100 billion.
The goal of the merger was to increase revenue and profits by bringing Kraft’s products to new markets abroad and to cut costs by reducing human capital. The merger was widely criticized in 2019 when the company announced billions in losses and SEC investigations. In 2022, the company’s net sales were $26 billion.
A reverse merger is when a private company merges with a larger company that’s publicly listed on the New York Stock Exchange (NYSE). It’s also known as a reverse takeover (RTO) or reverse initial public offering (IPO).
Through a reverse merger, a private company can go public without going through the conventional IPO process, which is costly and time-intensive. A reverse merger can also help companies restructure and strategize during financial instability, as shown in the example below.
The reverse merger process requires increased due diligence to vet the investors’ motivations, liabilities, and risks. There are also more regulatory and compliance burdens involved in going public that the private company may need to prepare managers for.
Example of a reverse merger
The Burger King and Justice Holdings merger is a strong example of a reverse merger. Burger King first went public in 2006 after filing an IPO earlier in the year, and began trading in May. The restaurant chain experienced a financial decline after the 2008 financial crisis and the rising popularity of its key competitor, McDonald’s.
3G Capital acquired most of Burger King’s stock and turned it into a private company before restructuring it. 3G Capital then merged Burger King with the British firm Justice Holdings Limited to create Burger King Worldwide before making it a publicly traded company on the NYSE yet again.
De-risk your next M&A with Deel
Knowing the different types of mergers and acquisitions can help businesses make informed decisions regarding their growth strategies.
And when they’re ready to bring their new employees on board, Deel’s global payroll and employer of record (EOR) services can help. Payroll is often the first process a new business owner wants to control. If you sell a business, having outsourced payroll can increase the deal value, as the new owner has to simply transfer the contract.
To learn more about using an EOR to support an international transaction, download your free resource, How to De-Risk Global M&As Using an Employer of Record. The guide includes:
- What an EOR is and the services it provides
- EOR use cases for M&As (with examples)
- Crucial components of a successful global M&A
- The M&A process with Deel
- And more