If you’re looking to expand operations, cut costs, and boost profits, acquiring a business could help you reach your goals. But before you start looking for suitable options, it’s important to research the different kinds of business acquisitions.

In this article, we’ll discuss every type of business acquisition, focusing on how they work, their benefits and drawbacks, and the ways in which they’re similar and different.

Key Takeaways

• There are 11 types of business acquisitions, including horizontal acquisitions, vertical acquisitions, mergers, consolidations, share and interest exchanges and acquisitions, and asset acquisition.
• Before taking over a company, you should know which method of acquisition will suit your business best, otherwise you could be saddled with a range of problems after the acquisition is complete.
• If you’re looking for a loan for your business acquisition, contact Llama Loan today to explore all of your options!

What is a Business Acquisition?

In the business world, an acquisition is essentially when one company takes control of another. In many cases, the terms of the acquisition are agreed upon by the acquirer and the target company, but sometimes an acquisition can be hostile, meaning the acquirer takes control by force.

Business acquisitions happen for numerous reasons, but usually acquirers seek target companies so they can increase profits, expand operations, or gain control of valuable patents and technology.

Finally, in order for an acquisition to be deemed legal, it must be approved by the Securities Exchange Commission (SEC), the Federal Trade Commission (FTC), and the Department of Justice (DOJ).

Types of Business Acquisitions

Vertical Acquisition

A vertical acquisition, otherwise known as vertical integration, is when an acquirer takes control of a company that’s part of its production process. The target company can be higher or lower than the acquirer in the supply chain, which is why this kind of acquisition is known as vertical.

Let’s use a basic manufacturing company as an example. It could take control of a company from which it sources materials, which would be an example of acquiring up. If it purchases a store that sells its products, this would be an example of acquiring down.

This kind of acquisition has numerous advantages. For one, if a business is afraid that one of the companies from which it purchases materials is going to raise prices, it can acquire the company to exert more control over the price of production.

Additionally, vertical acquisition can help a manufacturer increase profits. Say the manufacturer purchases a distribution company. It could reorganize and streamline the acquired company to improve its distribution, which is sure to grow its customer base and subsequently boost profit margins.

However, vertical acquisitions can create problems, especially for the acquirer. Take, for example, the instance of a business acquiring a company that used to source its materials. If the acquirer changes operations at the newly acquired company to cut costs, boost productivity, etc., the opposite could happen.

Horizontal Acquisition

When a business acquires a company that’s similar in size and purpose, this is known as a horizontal acquisition. These acquisitions happen for a variety of reasons, but in most cases two companies merge this way to eliminate inefficiencies, cut costs, boost profits, and grow market share.

Think of one financial services company acquiring another financial services company. From doing so, the acquirer gains customers and staff, useful patents and technology, and market share. Additionally, this eliminates a competitor from the market, which can cut costs, especially those relating to production, distribution, and marketing.

Of course, like vertical acquisitions, horizontal acquisitions have downsides. For one, a merger of this kind can lead to head-butting between the two companies, in which case productivity may suffer and cause a drop in profits. Also, horizontal mergers can attract scrutiny from regulators, especially if the acquisition results in the new company dominating its industry.

Market Extension Acquisition

A market extension acquisition is like a horizontal acquisition in that the merging companies are alike in size and offer similar products and/or services. However, they cater to different markets, and this is what makes their merger a market extension acquisition instead of a horizontal acquisition.

The new company won’t gain substantial share in one particular market, rather it will be a big player in two distinguishable markets, hence the name market extension.

Let’s consider a manufacturing company again. If its main market is the country in which it’s based, but it wants to reach customers in other parts of the world, merging with a similar company that does considerable business in the desired market may yield favorable results.

Similarly, if the company mainly sells its products to one industry, but they see potential in expanding to another industry, acquiring a similar company that already sells similar products in the target industry may bring tremendous success.

It can be argued that market extension acquisitions tend to be more fruitful than horizontal acquisitions because reorganization may not be required for the former to achieve desirable results.

Conglomerate Acquisition

When one company takes over another, and the latter is nearly or totally unlike the former in how and where it conducts business, it’s known as a conglomerate acquisition. Technically, there are two kinds of conglomerate acquisitions:

• Pure: The companies have nothing in common when they merge.
• Mixed: The companies are merging to improve product reach and market penetration.

In many cases, conglomerate acquisitions can increase market share, produce synergy, and yield more cross-selling opportunities. Additionally, these acquisitions can result in larger profits and improved efficiency. Diversification is also an advantage, in that losses incurred by one entity can be offset by the gains of another.

But there are disadvantages too. For one, conglomerate acquisitions can reduce cohesion, making it difficult for all the entities to work towards the same end. Also, taking over a largely or totally unrelated business could damage the acquirer’s image, which may reduce market share as a result.

In the end, conglomerate acquisitions were popular in the 1960s and 1970s, but today they’re rarely pursued because their advantages aren’t that attractive. Also, they’re widely disliked, so pursuing one could result in regulatory scrutiny that’s costly in numerous ways.

Congeneric Acquisition

In a congeneric acquisition, the company being acquired doesn’t offer the same products and/or services of the acquirer, but they may or may not operate in the acquirer’s industry. In most cases, these mergers are beneficial for both parties, especially if it’s easy to produce synergy without extensive reorganization or complex integration.

Vertical, horizontal, and conglomerate acquisitions are all classified as congeneric acquisitions, but they differ in numerous ways. That said, all are sought to improve one or more businesses in a handful of ways, and there are benefits and drawbacks of each.

Citi merging with Travelers Group in 1998 was a congeneric merger. Before the merger, Citi offered traditional banking services and credit cards, while Travelers specialized in insurance and brokerage services. After the merger, the newly formed Citigroup would offer all these services and more.

Merger

The terms merger and acquisition both refer to an instance where one or more businesses become a singular entity. However, mergers and acquisitions aren’t the same thing. A merger is when two companies agree to join forces to the benefit of both, whereas an acquisition is when one company takes over another, either by agreement or force.

Just as there are three main kinds of acquisitions, there are three main kinds of mergers, namely vertical, horizontal, and conglomerate mergers. These mergers can result in market share gains, cut costs, higher profits, improved efficiency, and much more. However, they can also lead to inefficiency, administration issues, shrinking market share, and financial problems.

Additionally, there are triangular mergers, but these are different from the main three and explained below.

Triangular Merger

A triangular merger is unique in that it requires a subsidiary, meaning there are three entities involved: the acquirer, the acquirer’s subsidiary, and the target. There are two kinds of triangular mergers:

• Forward triangular merger: The subsidiary ceases to exist after it’s merged with the target, and shareholders of the latter get shares in the acquiring company or cash for their shares.
• Reverse triangular merger: The subsidiary remains but the target’s operations, assets, and liabilities aren’t affected. Again, target shareholders get acquirer stock or cash for their shares.

Triangular mergers are advantageous in a few key ways. For one, this kind of merger can be tax-free for the target company’s shareholders. Additionally, it can preserve legal agreements. Lastly, it’s ideal for acquirers that are seeking flexible payment.

However, these mergers can be complex and expensive, so it’s best to thoroughly understand how they work before pursuing one.

Consolidation

When two companies merge to form a totally different company, this is known as a consolidation. The new company will have a different name, and its operations, staff, etc. may change as well.

Many of the benefits and drawbacks we’ve discussed already are relevant here as well. Specifically, consolidating may result in market share gain, improved efficiency, higher profits, and deeper market penetration.

However, consolidating could also result in redundancy, diminished brand image, and shrinking market share.

Facebook acquiring Instagram in 2012 is an example of consolidation. Both companies were key players in the social media space, and their merging led to the creation of Meta. The new company operates across industries and sells to nearly every market in the world.

Share and Interest Exchanges

In some states, a company can pursue a share exchange to acquire another. Basically, the acquirer takes ownership of all the target’s outstanding shares. An acquirer could also pursue an interest exchange, wherein they take control of the ownership interests of an unincorporated entity. For either deal to go through, it must be approved by the relevant regulators.

An exchange can reach the same end as a reverse triangular merger, and many acquirers choose the former over the latter. Like in an RTM, the target becomes a subsidiary of the acquirer. However, the acquirer doesn’t have to form a subsidiary before taking control of the target, so it’s a simpler process.

An exchange may also be useful when a direct, non-statutory acquisition of shares or ownership interests isn’t feasible. With an exchange, only a majority vote is required for the deal to go through (in most cases). In a non-statutory acquisition, all the owners of the target would have to sell their interests for the deal to go through.

Share and Interest Acquisitions

When one company acquires all interest or a controlling interest in another by directly purchasing shares, this is known as share acquisition. The shares can be paid for in cash, acquirer stock, or property. In this case, the target becomes a subsidiary of the acquirer.

If a company purchases stock in an unincorporated business entity, like an LLC, this is an interest acquisition.

For this kind of deal to go through, all an acquirer has to do is buy shares from the owners of their target company, meaning shareholder meetings are totally bypassed.

Of course, there are disadvantages. For one, it can take a lot of time to acquire shares this way, and it can be expensive. Furthermore, if some owners refuse to sell, the law won’t require them to do so, which could create problems later.

Asset Acquisition

In an asset acquisition, one company purchases all or most of another’s assets, but the target company retains its independence. The assets can be purchased with cash, stock, ownership interests, or property. Also, payment for the assets is made to the company, not its owners. A key advantage here is that the acquirer avoids the target’s liabilities, but it can be complex.

Final Thoughts

To recap, there are 11 kinds of business acquisitions, including vertical and horizontal acquisitions, market extension and conglomerate acquisitions, congeneric acquisitions, mergers and triangular mergers, consolidation, share and interest exchanges and acquisitions, and asset acquisition.

If you’re looking to acquire a business, or you’re hoping that your business gets acquired, it’s best to understand the basics of each acquisition type before pursuing one.