5 Types of M&A

There are five commonly-referred to types

of business combinations known as
mergers:
1) Horizontal merger,
2) Market extension merger,
3) Vertical merger and
4) Product extension merger.
5) Conglomerate merger,
 Conglomerate
• A merger between firms that are involved in totally unrelated
business activities. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers involve
firms with nothing in common, while mixed conglomerate
mergers involve firms that are looking for product extensions
or market extensions.
Example

• A leading manufacturer of athletic shoes merges with a soft

drink firm. The resulting company is faced with the same
competition in each of its two markets after the merger as the
individual firms were before the merger. One example of a
conglomerate merger was the merger between the Walt
Disney Company and the American Broadcasting Company.
 Horizontal Merger
• A merger occurring between companies in the same industry. Horizontal
merger is a business consolidation that occurs between firms who operate
in the same space, often as competitors offering the same good or service.
Horizontal mergers are common in industries with fewer firms, as
competition tends to be higher and the synergies and potential gains in
market share are much greater for merging firms in such an industry.

Example

• A merger between Coca-Cola and the Pepsi beverage division, for

example, would be horizontal in nature. The goal of a horizontal merger is
to create a new, larger organization with more market share. Because the
merging companies' business operations may be very similar, there may
be opportunities to join certain operations, such as manufacturing, and
reduce costs.
 Market Extension Mergers
• A market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension
merger is to make sure that the merging companies can get access to a bigger
market and that ensures a bigger client base.

Example

A very good example of market extension merger is the acquisition of Eagle

Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,
Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets
worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest
banks in the metropolitan Atlanta region as far as deposit market share is concerned.
One of the major benefits of this acquisition is that this acquisition enables the RBC to
go ahead with its growth operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market
of Atlanta , which is among the leading upcoming financial markets in the USA. This
move would allow RBC to diversify its base of operations.
 Product Extension Mergers
• A product extension merger takes place between two business
organizations that deal in products that are related to each other and
operate in the same market. The product extension merger allows the
merging companies to group together their products and get access to a
bigger set of consumers. This ensures that they earn higher profits.

Example

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of

product extension merger. Broadcom deals in the manufacturing Bluetooth
personal area network hardware systems and chips for IEEE 802.11b wireless
LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant

for handsets that are equipped with the Global System for Mobile
Communications technology. It is also in the process of being certified to
produce wireless networking chips that have high speed and General Packet
Radio Service technology. It is expected that the products of Mobilink
Telecom Inc. would be complementing the wireless products of Broadcom.
 Vertical Merger
• A merger between two companies producing different goods or services
for one specific finished product. A vertical merger occurs when two or
more firms, operating at different levels within an industry's supply chain,
merge operations. Most often the logic behind the merger is to increase
synergies created by merging firms that would be more efficient operating
as one.

Example

A vertical merger joins two companies that may not compete with each other,
but exist in the same supply chain. An automobile company joining with a
parts supplier would be an example of a vertical merger. Such a deal would
allow the automobile division to obtain better pricing on parts and have
better control over the manufacturing process. The parts division, in turn,
would be guaranteed a steady stream of business.

Synergy, the idea that the value and performance of two companies
combined will be greater than the sum of the separate individual parts is one
of the reasons companies merger.
 Reason for Mergers
There are generally two types of mergers:

(a) Horizontal - between competing firms in the

same sector and in the same part of the
value chain; and

(b) Vertical - between firms in the same sector

but in different parts of the value chain.
Mergers are often described as a
marriage since it normally involves two
partners more or less equal in strength
which have decided to combine their
managerial and operational functions
to form a new company with shared
resources and corporate objectives.
 There are a number of reasons that
companies pursue mergers:
• Industry Consolidation
• Most industries are fragmented and
consist of many competitors. A merger
is a tactical move that enables a
company to reposition itself (with a
merger partner) into a stronger
operational and competitive industry
position.
 Improve Competitive Position
• One important reason that companies
combine is to improve their competitive
market position. Merging with a
competitor is an excellent way to
improve a company's position in the
marketplace. It reduces competition, and
allows the combined firm to use its
resources more effectively.
 Defensive Move

• A merger is an attractive tactical

move in any economic
environment - particularly in a
cyclical down-turn where a
merger can be a strong defensive
move.
 Synergies
Reduce costs and improve earnings. One of the
most common reasons for a merger are synergies -
allowing two companies to work more efficiently
together than either would separately.
Such synergies may result from the ability to
exploit economies of scale, eliminate duplicated
functions, share managerial expertise and raise
capital.
Generally, the assumption is that larger firms are
more cost-effective than are smaller companies (i.e.
exhibit "economies of scale").
 Market / Business / Product Line
Issues
• Often mergers occur simply because one firm is in a
market that another wants to enter or in order to gain
a critical size that can justify the expense of geographic
expansion.
• All of the target firm's experience and resources (the
employees' expertise, business relationships, etc.) are
available by merging with the other party. Whether the
market is a new product, a business line, or a
geographical region, market entry or expansion is a
powerful reason for a merger.
• Closely related to these issues are product line issues.
A firm may wish to expand, balance, fill out or
diversify its product lines.
 Acquire Resources and Skills
• One firm may simply wish to obtain access to
the resources of another company or to
combine the resources of the two companies.
• These resources may be tangible resources such
as
• plant and equipment,
• or they may be intangible resources such as
trade secrets, patents, copyrights, leases, etc.,
• or they may be talents of the target company's
employees.
 Synergy and sources of synergy:
• One plus one makes three: this equation
is the special alchemy of a merger or an
acquisition.
• The key principle behind buying a
company is to create shareholder value
over and above that of the sum of the two
companies.
• Two companies together are more
valuable than two separate
companies - at least, that's the
reasoning behind M&A.
• Synergy is the magic force that
allows for enhanced cost efficiencies
of the new business.
• Synergy takes the form of revenue
enhancement and cost savings.
 By merging, the companies hope to
benefit from the following:
• Staff reductions - As every employee knows,
mergers tend to mean job losses.
• Consider all the money saved from reducing
the number of staff members from
accounting, marketing and other
departments.
• Job cuts will also include the former CEO, who
typically leaves with a compensation package.
• Economies of scale - Yes, size
matters. Whether it's purchasing
stationery or a new corporate IT
system, a bigger company placing the
orders can save more on costs.
• Mergers also translate into improved
purchasing power to buy equipment
or office supplies - when placing
larger orders, companies have a
greater ability to negotiate prices
with their suppliers.
• Acquiring new technology - To stay
competitive, companies need to stay on
top of technological developments and
their business applications.
• By buying a smaller company with
unique technologies, a large company
can maintain or develop a competitive
edge.
• Improved market reach and industry visibility -
Companies buy companies to reach new markets
and grow revenues and earnings. A merge may
expand two companies' marketing and
distribution, giving them new sales opportunities.
• A merger can also improve a company's standing
in the investment community: bigger firms often
have an easier time raising capital than smaller
ones.
 Gains from Mergers:

1. Obtaining quality staff or additional skills,

knowledge of your industry or sector and other
business intelligence.
For instance, a business with good management
and process systems will be useful to a buyer who
wants to improve their own.

Ideally, the business you choose should have

systems that complement your own and that will
adapt to running a larger business.
2. Accessing funds or valuable assets for
new development. Better production or
distribution facilities are often less
expensive to buy than to build. Look for
target businesses that are only marginally
profitable and have large unused capacity
which can be bought at a small premium to
net asset value.
3. Your business
underperforming.
For example, if you are struggling
with regional or national growth it
may well be less expensive to buy
an existing business than to
expand internally.
4. Accessing a wider customer
base and increasing your market
share. Your target business may
have distribution channels and
systems you can use for your own
offers.
5. Diversification of the products,
services and long-term prospects of
your business. A target business may
be able to offer you products or
services which you can sell through
your own distribution channels.
6. Reducing your costs and
overheads through shared
marketing budgets, increased
purchasing power and lower
costs.
7. Reducing competition.
Buying up new intellectual
property, products or services
may be cheaper than
developing these yourself.
8. Organic growth, ie the existing
business plan for growth, needs to be
accelerated. Businesses in the same
sector or location can combine
resources to reduce costs, eliminate
duplicated facilities or departments
and increase revenue.