Mix and Match - Types of Mergers and Acquisitions

A true merger occurs only when both organizations combine all their assets into one newly created organization. Whichever of the following methods is chosen, the intended outcome is a larger, more financially powerful organization.

Horizontal merger

This type of merger involves two organizations operating in a similar market, and competing at a similar level. The assumption is that the merger will benefit the economies of scale for both organizations.

Vertical merger

Vertical mergers take place between two organizations providing different parts of the same service. This way the organizations integrate backwards or forwards along the supply chain, either closer to the raw material, or closer to the end product.

Conglomerate or concentric merger

Here, the merger takes place between organizations operating in different markets or offering different products or services. The strategy may be to increase product lines, or to increase market share.

Types of acquisition

Acquisitions, also known as takeovers, differ from mergers in that the organization that is acquired loses its identity and becomes part of the organization taking it over.

Friendly

The acquiring organization makes a proposal to the target organization, and an offer is made. The acquisition receives agreement from the management of the target organization.

Hostile

Hostile takeovers can be performed either with, or without warning. They may come about after a friendly approach has been rebuffed, or as the result of enough shares being bought by the acquired organization to provide them with a voting majority.

Management buyout

Management buyouts involve the purchasing of a business by the existing management team, often in partnership with some form of external financier. Effectively, each member of the management team acquires a slice of the equity in the organization, in return for a fairly modest input of capital. These are often used when an organization is in financial difficulties, or in family businesses where retirement forces succession problems.

Halfway houses

If an organization decides against a merger or acquisition there are a number of other similar growth strategies which may be less costly and time-consuming.

Joint ventures

Joint ventures involve two or more businesses joining together in a contractual agreement to conduct a specific business enterprise. The venture is for one project only, perhaps the staging of a one-off event, or a special product or service. All involved share profits and losses for the agreed enterprise.

Strategic alliance

Strategic alliances are similar to joint ventures, but differ in that they tend to be longer term. They occur where two or more businesses come together in a business effort, such as working together to buy in bulk, or to provide different parts of a finished product. This approach minimizes the risk by spreading it over more than one organization, without having the cost and integration of a merger or acquisition.

Partnerships

Two or more organizations work together as one business, with all partners sharing the profits. However, legally, each of the partnership businesses is still regarded as a single entity, meaning that if one partner suffers financial problems, the other partners cannot be held liable.

Integration

Once a merger or acquisition has taken place, the integration of the two entities begins. The process of integration should start as early as possible, as the sooner it begins, the sooner the projected value can be realized. Senior managers often overlook the need to plan for integration, assuming the two organizations will just seamlessly join. Many M&As fail due to a lack of attention the problems associated with ongoing integration.In Strategy, An International Perspective, De Wit and Meyer identify two key factors that affect integration.[1]

• Strategic interdependence – When the strategies of both organizations are mutually dependent
• Organizational autonomy – When the organizations retain an individual sense of identity

Using these factors, De Wit and Meyer identified four integration approaches:

1. Preservation acquisitions – These have a high need for autonomy and a low need for interdependence. In these situations the acquired organization needs to be nurtured. Management can be done at arm's length, and value is brought about by encouraging positive changes in the acquired organization’s ambition, risk taking and professionalism.

2. Symbiotic acquisitions – Have a high need for both interdependence and for autonomy. The two organizations initially coexist, before becoming more and more independent. Tensions can arise as each organization’s need for strategic interdependence conflicts with the desired autonomy. To succeed, these unions must reach a stage where each organization has successfully added to the original qualities of the other.

3. Absorption acquisitions – A high degree of interdependence along with a low need for autonomy means that integration in these situations will, over time, result in a full consolidation of the operations, structure and culture of the two organizations.

4. Holding – The final of the four integration approaches, where little strategic interdependence or organizational autonomy is required. This situation only occurs where the purpose of the acquisition is purely financial. It may be that the organization is bought purely to prevent a rival doing so, and is then sold off for a higher price, or it may be broken down into its component parts (asset stripped).

Only once integration has been successfully completed, or at least a significant degree of it, will the returns hoped for be achieved.