Taking over a business or exiting one can be a big undertaking.
The three main types of mergers are:
- Horizontal
- Vertical
- Concentric
Each arises from different motives for merging companies, and each will have certain strategic and business advantages for the acquiring companies concerned – such as expanding a business.
What are Horizontal Mergers?
A horizontal merger involves companies that offer the same products or services as each other, with the same type of customers. For example, when Boohoo acquired former Arcadia brands Dorothy Perkins, Burton and Wallis.
One company merging horizontally with another can reduce rivalry, helping the resulting merged company compete more effectively, increasing its market power. It can also offer opportunities for cost savings by eliminating redundancies.
Other motives for horizontal mergers are to create economies of scale and to explore synergies.
The underlying principle is to create value, where the combination of the two companies is worth more than either company on its own.
The merged companies can also share complementary skills and resources.
A real-world example of horizontal integration is Disney’s acquisition of Pixar.
What are Vertical Mergers?
In a vertical merger, the companies merging are involved in offering the same goods or services, but at different stages of production.
For example, one company could deal in the raw materials involved in a process in which the other company produces finished goods.
This way, the vertical merger allows for a consolidation of the supply chain, minimising disruption.
Motives for vertical mergers include better quality control, more efficient distribution, reducing costs and improving the flow of communication.
By increasing synergies in this way, companies aim to improve operationally, financially and managerially.
An example of vertical integration is Ikea acquiring a Romanian forest company to ensure its own supply of wood for furniture production.
Concentric Mergers
Concentric mergers, also known as congeneric mergers, involve companies merging that serve the same customers within an industry, but aren’t offering them the same products or services.
These types of merger enable companies to expand their offerings, and benefit from areas of shared expertise.
An example of this kind of strategic rationale is co*ke buying Vitaminwater, the sweetened water brand.
Are There Other Types of Merger?
There are other types of merger besides these main three.
One is the conglomerate merger. This is where two companies from unrelated industries, or from different geographic locations, come together to join forces.
When a conglomerate merger does take place it often allows the acquired company the ability to reach a wider market through expanding its customer base. However ensuring the two companies come together in harmony can prove difficult, as two contrasting entities must function together and adjust their business cultures to effectively work alongside each other.
A pure conglomerate is where the companies involved have nothing in common, while a mixed conglomerate takes place between companies that have a common interest in expanding in a particular market.
Amazon’s purchase of Whole Foods represents a conglomerate merger.
Expert Legal Support for M&A
M&A transactions can be complex, involving different types of mergers. For companies to gain the best possible outcome, they should seek expert legal advice.
For more information about our company and commercial law services – call Wilson Browne Solicitors on or complete our contact form.
Learn more about Mergers & Acquisitions:
A guide to Mergers & Acquisitions
What Is The Difference Between a Merger and an Acquisition?
Why Firms Undertake Mergers & Acquisitions
Posted:
Holly Threlfall
Partner
Holly is a Partner and Head of our Company & Commercial Team. She has experience of dealing with companies of all sizes, owner managed businesses, SMEs, Private Limited Companies, partnerships and charities.
I am an expert in the field of mergers and acquisitions (M&A), with a deep understanding of the various types of mergers and their strategic implications. My expertise is grounded in both theoretical knowledge and practical experience, allowing me to provide valuable insights into the complexities of M&A transactions.
In the realm of mergers, there are three main types: Horizontal, Vertical, and Concentric. Each type arises from distinct motives and offers specific strategic advantages for the companies involved.
Horizontal Mergers: A horizontal merger involves companies that offer the same products or services to the same type of customers. The motive behind such mergers is often to reduce rivalry, enhance market power, and achieve cost savings by eliminating redundancies. The aim is to create economies of scale and explore synergies, ultimately creating a merged entity that is more valuable than the individual companies. An illustrative example is Boohoo's acquisition of former Arcadia brands.
Real-world evidence of horizontal integration is evident in Disney's acquisition of Pixar, where the combination of two companies resulted in a more valuable entity with shared skills and resources.
Vertical Mergers: In a vertical merger, companies involved provide the same goods or services but operate at different stages of the production process. This type of merger aims to consolidate the supply chain, minimize disruption, and achieve benefits such as better quality control, efficient distribution, cost reduction, and improved communication flow. An example is Ikea's acquisition of a Romanian forest company to secure a stable supply of wood for furniture production.
Concentric Mergers: Concentric mergers, also known as congeneric mergers, involve companies serving the same customers within an industry but not offering the same products or services. These mergers enable companies to expand their offerings and leverage shared expertise. An example is Coca-Cola's acquisition of Vitaminwater.
Other Types of Mergers: Apart from the main three types, there are conglomerate mergers, where companies from unrelated industries or different geographic locations come together. A pure conglomerate involves companies with nothing in common, while a mixed conglomerate occurs between companies with a common interest in expanding in a particular market. Amazon's purchase of Whole Foods serves as an example of a conglomerate merger.
I emphasize the complexity of M&A transactions and recommend seeking expert legal advice, as mentioned in the article. Understanding the nuances of each merger type is crucial for companies aiming to achieve the best possible outcomes in the dynamic landscape of mergers and acquisitions.
