5 Types of Merger & Acquisition Strategies: Benefits & Challenges
If you’re a company looking to grow, you might be considering adopting an M&A strategy to diversify your products and services, reach new target markets and increase revenue.
However, integrating two separate entities brings many challenges, and there’s no strategy that’s one-size-fits-all.
In order to maximize your potential for growth and convince others to partner with you, you need to obtain a solid understanding of your business on every level, including: processes, technology, team members, stakeholders, competitors, industry ongoings and more.
It’s vital that you understand the different types of mergers and acquisitions so you can decide which is best to pursue and start allocating the proper resources.
Questions to Ask Before a Merger or Acquisition:
- What is the main goal I’m trying to achieve?
- What value do I aim to create?
- What traits and characteristics does my target company embody?
- What does the timeline look like?
- Who is going to be involved and what are they going to do?
- Do I have the right technology and systems in place to gather all the necessary data?
- What does my outreach strategy look like?
- How am I going to present my business to potential partners?
We’ll now explore the five types of mergers and acquisitions alongside common benefits and challenges so you’re best prepared to find the right partner for your growth.
Types of Merger & Acquisition Strategies:
1. Vertical M&A Strategy
A vertical M&A strategy occurs when two or more businesses that operate within different stages of the supply chain come together to create an integrated good or service.
Example of a vertical M&A strategy: eBay acquiring PayPal — if you purchase something from eBay but pay via PayPal, you’re technically experiencing the result of a vertical merger.
Benefits & Challenges of a Vertical M&A Strategy
Benefits:
- Increased operational efficiency
- Lower operating costs
- Higher profits
- Better quality control
Challenges:
- Contrasting company cultures
- Potential to lose key team members as roles are combined
- Increased bureaucratic costs
Common benefits of vertical mergers include increased operational efficiency and lower operating costs, as these responsibilities are now shared by two entities rather than one.
That means higher profits — but only if you’re able to successfully navigate contrasting company cultures and increased bureaucratic costs.
Plus, there’s also the potential to lose key team members, as now you have double the workforce under one roof.
2. Horizontal M&A Strategy
A horizontal M&A strategy can be defined as two businesses that operate in the same industry joining forces to eliminate competition.
Example of a horizontal M&A strategy: the integration of Disney and Pixar.
Benefits & Challenges of a Horizontal M&A Strategy
Benefits:
- Increased revenue
- Diversification of products and services
- Larger market reach
- Less competition
Challenges:
- Increased regulatory scrutiny
- Less business mobility
- Less control over decision making
- Providing less value to your customers compared to before
Aside from less competition, horizontal mergers often result in a spike in revenue due to the diversification of products and services and access to a new portion of the market.
Depending on who you choose to partner with, you may find yourself facing an increase in regulatory scrutiny, which leads to a reduction in business mobility and control over decision making.
Unfortunately, there’s also the potential that your pre-merger products and services were more valuable to your customers than your new offerings – that’s why conducting adequate testing and research before you go to market is so important.
3. Conglomerate M&A Strategy
A conglomerate M&A strategy involves merging two companies that have entirely separate business activities.
There are two forms: pure, in which each company continues to do business solely in their own market, and mixed, in which product and market extensions are conducted.
Example of a conglomerate M&A strategy: Amazon’s acquisition of Whole Foods.
Benefits & Challenges of a Conglomerate M&A Strategy
Benefits:
- Larger market share
- Business diversification
- Higher revenue
Challenges:
- Less efficiency
- Opposing workplace cultures
- A change in core business values, which can cause friction with customers and stakeholders
Benefits of conglomerate mergers include an increase in market share, business diversification, and a spike in revenue, as you are now able to cross sell your products and services.
However, you may also experience a reduction in efficiency and a clash of workplace culture. This type of merger can also cause you to shift away from your core business values, resulting in friction with your customers and stakeholders.
4. Market Extension M&A Strategy
Market extension M&A strategy is when two entities that produce the same type of product to different markets come together under one roof.
Example of a market extension M&A strategy: When the Royal Bank of Canada, RBC Centura, Inc., acquired American-based Eagle Bancshares, Inc., resulting in RBC gaining access to over $1.1 billion in assets.
Benefits & Challenges of a Market Extension M&A Strategy
Benefits:
- Larger client base
- Extended market reach, potentially international
Challenges:
- More business responsibility
- Higher capital requirements
- Potential for debt to accrue
A market extension merger provides access to a larger client base and an increase in market reach – potentially worldwide, in fact.
However, more growth results in more responsibility, as you now have to manager bigger capital requirements and the potential for debt to accrue – which you’ll have to navigate even if it’s not stemming from your end.
Example of a market extension: NetSuite’s acquisition of Oracle.
5. Product Extension M&A Strategy
A product extension M&A strategy involves two companies within the same market provide different types of products or services that are designed to be consumed together. This differs from market extensions in that instead of trying to reach new markets, you’re looking to diversify your products and services.
Example of a product extension M&A strategy: Pepsi Co.’s acquisition of Pizza Hut.
Benefits & Challenges of a Product Extension M&A Strategy
Benefits:
- Extended customer base
- Shared resources
- Lower operational costs
Challenges:
- Market clutter or confusion
- Less efficiency for production and marketing
The main benefit is the creation of a singular “mega product” that grants access to an extended customer base.
In addition, since you’re sharing resources and costs with another company, you’ll often see a reduction in the money you spend on operational processes.
However, the downside is the potential to over-clutter the market and experience a decline in the efficiency of your production process.
How to Choose the Best M&A Strategy & Move Forward
If you want to put your best foot forward with your M&A strategy, you’ll need to conduct a detailed analysis of your company goals and operations.
Oftentimes, your business will become more attractive to potential partners if you focus on integrating optimized technology, reworking your KPIs and conducting detailed product and market research – so you may find yourself needing to take a step back to rework before you progress.
In order to properly execute one of the types of mergers and acquisitions and close the deal, you’ll need to outbid your competition, factor in ever-changing market conditions and adhere to new laws and regulations.
However, you don’t have to go it alone.
Our team at Bridgepoint Consulting has proven experience in conducting sell-side readiness to best position your company for a merger or acquisition. Or if you’ve already acquired a company but need a little guidance in conducting reporting and identifying synergy, our post-acquisition integration experts are here to help.
Whatever your needs, our diverse and experienced team of finance and accounting, technology, auditing, and risk and compliance professionals are here to provide the financial guidance you need exactly where you need it.
