Mastering Mergers and Acquisitions: Understanding the Basics, Objectives, and Types

May 03, 2024

What are M&A?

A merger is a process in which two or more companies come together to form a single entity. In a merger, the companies involved typically agree to combine their operations and assets, and to share in the risks and rewards of the resulting business. The new entity is often a larger and more diversified organization, with the potential to create synergies and efficiencies that were not possible before.

An acquisition, on the other hand, is the process by which one company acquires another company, typically by buying a controlling interest in the target company's stock or assets. In an acquisition, the acquiring company becomes the owner of the target company, which may continue to operate as a subsidiary or be merged into the acquiring company's operations. Acquisitions are often used as a growth strategy, allowing companies to expand into new markets, diversify their products or services, or gain access to new technologies or intellectual property.

The Objectives of M&A

The objectives of mergers and acquisitions include expanding the economy, increasing market capitalization, valuations, and demand and supply. Everything from management to philosophy to company policies falls under these objectives. Acquirers may actively seek out undervalued targets, as they may have more accurate expectations of the future value of the target firm, resulting in profitable undervalued target purchases.

The main objectives of mergers and acquisitions include revenue maximization. A loss-making company that merges with a profit-making company can achieve growth, while the acquiring company gains access to the customer base, products, and services used by the loss-making company. Mergers and acquisitions provide security, as the dual efforts of both companies result in backup or security for one another. This adds to the security of the company to deal with the market at large.

Mergers and acquisitions also result in customer recognition. The loss-making company's reputation is protected, and its customer base moves to the newly formed merged company, ultimately resulting in customer recognition. Additionally, mergers and acquisitions provide opportunities for diversification and tax benefits. Tax benefits are enjoyed when a loss-making company is merged or acquired by a profit-making company, reducing the tax burden.

Mergers and acquisitions also help to eliminate competition in the market, which can prove beneficial for the economic growth of the country as a whole. This allows companies to keep their prices high and supply a variety of goods and services. 

Finally, the combination of two companies creates a synergy effect, resulting in operational and management synergies that establish an efficient new working company.


Types of Mergers and Acquisition

  • Mergers: two companies' boards of directors approve the combination and seek shareholders' approval
  • Acquisitions: acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure
  • Consolidations: combining core businesses and abandoning the old corporate structures to create a new company, approved by stockholders of both companies
  • Tender Offers: one company directly offers to purchase the outstanding stock of another firm at a specific price, bypassing the management and board of directors
  • Acquisition of Assets: one company directly acquires the assets of another company, typically during bankruptcy proceedings
  • Management Acquisitions: a company's executives purchase a controlling stake in another company, taking it private with the help of a financier or former corporate officers, financed primarily with debt and must be approved by the majority of shareholders.


Types of Mergers

  • Horizontal merger: A merger between companies that are in direct competition with each other in terms of product lines and markets
  • Vertical merger: A merger between companies that are along the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
  • Market-extension merger: A merger between companies in different markets that sell similar products or services
  • Product-extension merger: A merger between companies in the same markets that sell different but related products or services
  • Conglomerate merger: A merger between companies in unrelated business activities (e.g., a  clothing company buys a software company)


Types of Acquisition

  • Horizontal Acquisition
    A horizontal acquisition occurs when one company acquires another company that operates in the same business. In some cases, these acquisitions involve competitors that serve the same customer base. However, a horizontal acquisition can also involve non-competitors. The benefits of a horizontal acquisition include potential increases in a company's customer base and market share, as well as opportunities to expand into new markets.
  • Vertical Acquisition
    A vertical acquisition is when one company acquires another company that operates at a different position in the supply chain. The acquirer may be higher up in the chain, or it may be lower on the chain. Vertical acquisitions can introduce new income streams, lower production costs, and streamline operations.
  • Conglomerate Acquisition
    A conglomerate acquisition occurs when the acquiring and target companies operate in unrelated industries or engage in unrelated activities (such as when a widget manufacturer is acquired by a non-related company). The main reason for a conglomerate acquisition is diversification. If one product or service is struggling, there are hopefully others that are performing well, providing stability for the company.
  • Congeneric Acquisition
    A congeneric acquisition is when the acquiring company and the acquired company offer different products or services but sell to the same customers. This type of acquisition helps a company increase market share and expand its product lines.