Are you thinking of completing an M&A transaction? Intentional planning and proper education give you an advantage when seeking out a buyer for your business or a company to acquire. Whether you’re thinking about a vertical, horizontal, or conglomerate merger, there are risks to consider and rewards to benefit from. Unsure of where to start? Then this guide is for you!

Terminology

Vertical Merger

A vertical merger or acquisition is defined as two companies within different stages of a supply chain merging. This type of merger can increase your market control, reduce costs associated with mergers and acquisitions, and increase overall efficiency. Additionally, a vertical merger can aid in securing the supply of raw materials or essential goods and restrict that supply among competitors. An example of a vertical merger is Amazon’s 2017 acquisition of Whole Foods.

Horizontal Merger

A horizontal merger or acquisition is defined as two companies in the same industry, at the same stage of a supply chain, that merge. This horizontal integration allows companies to reduce competition, diversify products/services, and tap into new markets. Horizontal mergers and acquisitions are aimed at increasing market share and utilizing economies of scale. An example of a horizontal merger is the 2015 merger between Kraft and Heinz. 

Conglomerate Merger

A conglomerate merger or acquisition occurs when two companies in unrelated industries merge. Conglomerate mergers are further divided into two types of conglomerate mergers: pure and mixed. A pure conglomerate merger involves firms with no common ground, while a mixed conglomerate merger involves companies seeking something, like a market expansion. An example of a conglomerate merger is the 2022 merger between eBay and PayPal.

Risks

Mergers and acquisitions are not without risks; however, with proper planning, you can mitigate the risks associated with them. Overvaluation, mismatched synergy, and cultural incompatibility are all examples of common, avoidable pitfalls in the M&A process. To reduce risks and maximize rewards, business owners should conduct thorough due diligence, form a solid integration strategy, and connect with M&A professionals to utilize their expertise. 

Rewards

Close Your Value Gap

A value gap is the discrepancy between a business owner’s perceived value of their business and the price a buyer is willing to pay for their business. There are many ways to close a value gap, but one of the quickest, most effective ways is an M&A transaction. By successfully acquiring another business, the value of your original business will increase. This increase may be enough to not only meet your expectations, but exceed them. 

Reach New Audiences

All forms of mergers and acquisitions discussed here allow business owners to reach new audiences. Accessing new audiences creates a flood of new clients and opportunities for your business to flourish. The larger your audience is, the more dependable and reputable your brand becomes. 

Increase Your Market Value

It should be no surprise that acquiring another business will lead to an increase in market value. While this return on investment may not be immediately noticeable as a buyer, all M&A transactions are committed with the intent to get their ROI.

Conclusion

It's integral to consider the different benefits of each type of merger before jumping into the process. While every M&A transaction comes with risks, the rewards far outweigh them. Mergers and acquisitions can be a confusing, overwhelming process, but it doesn’t need to be. Contact an experienced M&A advisor at Stony Hill Advisors today!