Mergers and acquisitions (commonly abbreviated as M&As) are a type of legal transaction. As the name suggests, an M&A is when two companies (or divisions thereof) perform a consolidation of assets. The result can be one company taking over another (or a division of a company) or the formation of a new entity by the consolidation of two companies. The reasons for undertaking an M&A are numerous — mostly financial or business-related — but in most cases, the endgame is to create value. So, in short, M&A is a process, in basic terms, that results when two companies combine with one another.

Although M&As appear to be the same thing, there are differences, such as the following.

Merger

When two companies combine. In cases of mergers, the legal entity is the new firm, and both firms that have merged are now legally defunct.

Acquisition

An acquisition is exactly as it sounds — when one company takes over another company. The legal entity is the parent company; the acquired firm is now part of that company. In most circumstances, the target company (the company that was acquired) retains its previous legal structure but is now a division of the parent company; in other cases, it gets absorbed by the parent company and becomes another part of it.

When Are M&As Used?

Why go through the M&A process? The main impetus behind an M&A is almost always for financial or business purposes. These reasons include boosting profits, acquiring assets, increasing market share, or reducing risk, among others. Some common reasons include the following.

  • Secure intellectual property (IP), products and resources: A target company might have some assets or resources that your company hasn’t developed. Acquiring a company with promising technology can give you a head start in that area.
  • Acquire an up-and-coming company: Similarly, a newcomer in the same space as your company might have some promising technology or products in the pipeline, items that might take your company years to produce.
  • Improve your company’s performance: A merger with another firm in the same space can add resources to your company, lessen the competition, cut costs, and boost profit margins and stock prices.

In addition, there are a myriad of other reasons why companies go through the M&A process. These include other financial reasons (lessen tax liabilities, use excess cash to gain instant market share, acquire a bargain), business reasons (reduce competition, forge a new direction for the company), and others.

9 Types of Mergers and Acquisitions

As mentioned earlier, there are many types of M&As. The most common types include the following.

  1. Vertical merger

A vertical merger is when two independent companies that provide different supply chain functions for similar goods or services merge into one. In most cases, the purpose of this type of merger is to boost synergies and gain a greater share of the market. It takes the resources of both companies involved to produce the finished product or service that is gained by the merger.

  1. Horizontal merger

A horizontal merger is similar to a vertical merger, but in this instance, it’s two companies that happen to produce similar (and competing) products and/or services. What these two companies offer appeals to the same demographic; by going through a horizontal merger, the merged company has increased market share, reduced competition, and can reduce operating costs.

  1. Conglomerate merger

Unlike vertical and horizontal mergers which both involve similar businesses, a conglomerate merger is a merger (or acquisition) that occurs between two companies with totally dissimilar products and/or services. There are pure mergers (no common products and/or services) and mixed mergers (some similarities of products and/or services). The goal of a conglomerate merger is to increase market share, diversify a company or extend into another business altogether.

  1. Market extension merger

A market extension merger is similar to a horizontal merger (as far as similar products and/or services are concerned), but this is a situation where the merged companies share no geographical overlap. It’s a way for a company to penetrate a new market quickly. Again, the goal here is to increase profits and market share.

  1. Product extension merger

At first glance, a product extension merger is nearly identical to a market extension merger, but there are some differences. For one, the companies involved do have geographical overlap for their related products and/or services. The subtle difference here is that, while these companies have comparable offerings, they have different target audiences. The goal here is to increase customer base, market share, and profits, as well as reduce costs.

  1. Short-form merger

A short-form merger (sometimes referred to as a parent-subsidiary merger) is when a parent company is merged with a subsidiary. In most instances, the subsidiary company is substantially owned by the parent, but that isn’t always necessarily the case. There are two different short-term merger scenarios – in the majority of cases, it’s “upstream,” which means the subsidiary is acquired by the parent company; it’s “downstream” when the parent company is merged into a subsidiary, which is far less common.

  1. Long-form merger

A long-form merger occurs when more than 50%, but less than 90% of shares of the target company were acquired in tender offer. In nearly every instance, the merger is completely successful. This is a more complex type of merger, as far as regulations and shareholder approval are concerned. Because of that, a long-form merger can be more time-intensive than other types of mergers.

  1. Forward merger

A forward merger (also referred as a direct merger) is an extremely common type of merger. Simply put, it’s a straight-forward deal in which an acquiring company merges with a target company. The result is that all of the target company’s assets (as well as liabilities) become part of the acquiring company.

  1. Reverse triangular merger

A more complex type of merger, a reverse triangular merger is a scenario where an acquiring company creates a new subsidiary, and that subsidiary actually purchases the target company and absorbs it. The advantage of doing this – the newly-created subsidiary has only one shareholder, which is the acquiring company. That way, the acquiring company gains complete control over the target’s assets and contracts, which isn’t the case in other types of mergers.

There are, of course, many versions of M&As, hybrids and other legal and business transactions that fall under the umbrella of mergers and acquisitions such as bolt-on and tuck-in acquisitions.

A Basic Tool for Any M&A

One of the most important tools for an M&A is a virtual data room (VDR). As an absolutely critical component of any M&A transaction, a VDR is an online location where all the players involved in the M&A process can store, search, share and edit (with the appropriate credentials, of course) the documents involved with the deal. Using a data room during your M&A dealings will provide the user-friendly interface, security and data management tools to help your entire M&A process flow more smoothly, at least in the area of sharing confidential information with others outside your organization.

Where CapLinked Helps The Process

CapLinked, a leader in the VDR space, provides users in multiple industries with secure virtual data rooms for all types of mergers and acquisitions. CapLinked data rooms contain cutting-edge features, including document and version management, high-level admin controls, 24/7 customer service, encryption, and multiple layers of security. In addition, it features a user-friendly interface that is compatible with virtually every OS, and, because of that, it gives users the ability to upload and download documents from virtually any type of computer, tablet or smartphone. Learn how CapLinked can help your M&A by signing up for a free trial.

Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.

Sources

Investopedia – Why Do Companies Merge With or Acquire Other Companies?

Wall Street Mojo – Mergers and Acquisitions Types

The Strategy Watch – Why Do Companies Merge?

Related Articles
The Perfect Pitch Deck
The Perfect Pitch Deck

What makes for an ideal deck? Rather than try to provide you with a definitive list, we thought we’d summarize Read more

What is Your Company or Asset Really Worth?
What is Your Company or Asset Really Worth?

Do you have the next Facebook, Groupon, or Google? Or do you have the next eToys or Webvan? Do you  have Read more

What is this Due Diligence Thing Anyway?
What is this Due Diligence Thing Anyway?

One of the least understood, yet most important, parts of the investment business is due diligence. Everybody has a different Read more

Longer Runways and Better Deals Through SEO
Longer Runways and Better Deals Through SEO

A key factor in negotiating a VC raise is the amount of "runway" a startup has left—the number of months Read more