Understanding Mergers & Acquisitions in Business

Mergers and acquisitions play an important role in the business world, allowing businesses to expand into new markets and pursue new opportunities, or allowing their owners to reap the reward of building a successful business. Yet, business mergers and acquisitions involve many moving pieces and can take several years.

With the help of a mergers and acquisitions lawyer from BMK Legal, you can position yourself in the ideal spot to begin acquiring another company, or selling your business. We can guide you through the steps you need to take, draft contract documents, negotiate on your behalf, and ensure you remain compliant with the law at every stage. Reach out to speak with a member of our multidisciplinary legal team today.

What Are Business Mergers and Acquisitions?

Mergers and acquisitions are two ways for businesses to combine efforts. Both bring many benefits and are effective ways to help companies grow within their marketplace. In short, mergers and acquisitions often result in more efficient processes at every level.

Management can identify inefficiencies, streamline processes, and improve communications. While the two processes are similar, mergers and acquisitions have significant differences. We explore those differences below.

Acquisitions

A business acquisition occurs when one company purchases another and controls the acquired company’s operations. Usually, that means the purchasing business acquires a majority of the acquired company’s shares. Acquisitions tend to place the entities on unequal terms with a hierarchical structure.

Mergers

A business merger is the merging of two or more businesses into one legal entity. Mergers tend to place the entities on relatively equal footing, particularly compared to hostile acquisitions. At the end of a merger, the merged companies no longer exist.

Types of Business Mergers

So, what are the different types of mergers that happen within businesses? There are five common types of business mergers:

Horizontal,
Vertical,
Product extension (“congeneric” mergers),
Market extension, and
Conglomerate.

The type of merger varies depending on the companies involved. In particular, mergers vary based on their business activities and markets as they relate to the other business.

Horizontal

In a horizontal merger, direct competitors join to form a new entity. Direct competitors have fundamentally similar products or services and operate in the same market. For example, Company A and Company B operate in the same city and sell custom drinking glasses. If they merged, it would be a horizontal merger.

Businesses often complete horizontal mergers to increase their market share and benefit from economy-of-scale cost savings.

Vertical

Vertical mergers involve companies within one supply chain. Merging businesses often means joining production and distribution, allowing the new business to better control the process, especially regarding quality control and communication.

For example, Company C manufactures eyeglass frames, and Company D sells eyeglasses. If they merged, it would be a vertical merger.

Product Extension

Product extension mergers involve businesses with related products or services in the same market. Companies might pursue product extension mergers to combine related products or services seamlessly.

For example, Company E sells paint, and Company F sells drywall. If they merged, it would be a product extension merger.

Market Extension

Market extension mergers involve businesses that perform the same activities in different markets. Companies pursue market extension mergers to expand their reach.

For example, Company G sells pastries in Boston, and Company H sells pastries in New York. If they merged, it would be a market extension merger.

Conglomerate

Conglomerate mergers involve unrelated businesses. They can be pure—involving companies that perform different business activities and operate in different markets—or mixed—involving companies seeking to merge their respective activities or markets to extend their product or market reach.

Consider two examples and three hypothetical companies. Company I manufactures lamps with specialty glass lampshades, Company J builds houses, and Company K sells hair care products.

If Companies I and J merged, it may be a mixed conglomerate merger. The new company could, for example, install specialized lighting in the houses it builds.

If Companies I and K merged, it may be a pure conglomerate. The new company may be looking to expand beyond the limits of either original company.

Types of Business Acquisitions

The major types of business acquisitions include:

Horizontal—the purchaser and the acquired company are direct competitors in the same market;
Vertical—the purchaser and the acquired company are part of the same supply chain;
Market extension— the purchaser and the acquired company offer similar products or services in different markets; and
Conglomerate—the purchaser and the acquired company offer unrelated products or services.

Consider the following business acquisitions examples as compared to our earlier merger examples:

Horizontal acquisition. Company A and Company B sell custom drinking glasses. Company A buys Company B in a horizontal acquisition.
Vertical acquisition. Company C manufactures eyeglass frames, and Company D sells eyeglasses. Company D buys Company C in a vertical acquisition.
Market extension acquisition. Company G sells pastries in Boston, and Company H sells pastries in New York. Company G buys Company H in a market extension acquisition.
Conglomerate acquisition. Company I manufactures specialty lamps, Company J builds houses, and Company K sells hair care products. Company I buys Companies J and K, where the purchase of Company J is a mixed conglomerate acquisition, and the purchase of Company K is a pure conglomerate acquisition.

Acquisitions can be friendly, where the acquired company consents, or hostile, where the company does not consent. When the acquired business consents, the companies can tailor the process. Hostile takeovers are typically less flexible.

Mergers and Acquisitions

Mergers and acquisitions can be very beneficial to a business if done right. At BMK Legal, we have extensive experience helping companies through the mergers and acquisition process. Our attorneys understand what is necessary to conduct a successful transaction. Contact us today to learn how we can guide you through merging two separate entities into one.