8.1 Types of Mergers and Acquisitions

Mergers and acquisitions are key strategies for corporate growth and expansion. Companies can combine through horizontal, vertical, or conglomerate mergers, each offering unique benefits and challenges. These strategies help firms increase market share, control supply chains, or diversify their business portfolios.

Acquisitions can be friendly or hostile, with different approaches to gaining control. Financing methods like leveraged buyouts allow for larger deals, while asset or stock acquisitions offer flexibility in what's purchased. Understanding these options helps companies make smart growth decisions.

Types of Mergers

Mergers Based on Industry Relationships

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• Horizontal merger combines two companies operating in the same industry and at the same stage of production (Exxon and Mobil)
  • Allows companies to increase market share, reduce competition, and achieve economies of scale
  • Can lead to increased pricing power and profitability
• Vertical merger involves the combination of companies operating at different stages of the production process within the same industry (Amazon acquiring a delivery company)
  • Enables better control over the supply chain, reducing costs and improving efficiency
  • Helps secure access to critical resources or distribution channels

Mergers Based on Diversification

• Conglomerate merger involves the combination of companies operating in unrelated industries (Berkshire Hathaway acquiring companies across various sectors)
  • Allows for diversification of business risks and potential for cross-selling products or services
  • Can be challenging to manage due to the lack of synergies and industry-specific knowledge
• Reverse merger occurs when a private company acquires a publicly traded company to bypass the lengthy and expensive process of going public (a private biotech company merging with a publicly traded shell company)
  • Enables faster access to public markets and capital
  • Carries risks such as inheriting the liabilities of the public company and facing increased scrutiny from regulators and investors

Acquisition Strategies

Acquisition Approaches Based on Target Cooperation

• Hostile takeover occurs when the acquiring company attempts to take control of the target company without the consent of its management or board of directors (Sanofi-Aventis' attempted takeover of Genzyme)
  • Often involves directly approaching shareholders or launching a tender offer to purchase shares
  • Can be costly and time-consuming, with the risk of the target company implementing defensive measures
• Friendly acquisition happens when the target company's management and board of directors approve the acquisition and recommend it to shareholders (Microsoft's acquisition of LinkedIn)
  • Allows for a smoother transaction process and better integration of the two companies
  • May require a higher premium to be paid to the target company's shareholders to secure their approval

Acquisition Financing Strategies

• Leveraged buyout (LBO) is an acquisition strategy where the acquiring company uses a significant amount of borrowed money to finance the purchase (KKR's acquisition of RJR Nabisco)
  • Allows the acquirer to make large acquisitions with limited capital
  • Increases financial risk due to high levels of debt, which can burden the combined company with substantial interest payments and default risk

Acquisition Methods

Asset vs. Stock Acquisitions

• Asset acquisition involves the purchase of specific assets and liabilities of the target company, rather than acquiring the entire company (Bayer acquiring Monsanto's crop science business)
  • Allows the acquirer to cherry-pick desired assets and avoid unwanted liabilities
  • Can be complex and time-consuming, requiring the identification and valuation of individual assets
• Stock acquisition entails purchasing the outstanding shares of the target company, thereby acquiring control of the entire company (Amazon acquiring Whole Foods Market)
  • Provides a simpler and more straightforward acquisition process
  • Requires the acquirer to assume all assets and liabilities of the target company, including any hidden or contingent liabilities