A business acquisition is when one company purchases all of, or the majority of, another business. In practically all instances, the acquiring company is motivated by a handful of key goals: longevity, stability, and growth.
The right acquisition can help your company secure its market share, remain relevant and profitable long-term, and develop its products and services to grow into new markets.
But in order to attain those benefits, you must first understand the different types of acquisition. Only then can you make informed strategic decisions about your company's future.
In this guide, we will explore the four key types of acquisitions. These are:
- Vertical acquisitions
- Horizontal acquisitions
- Conglomerate acquisitions
- Congeneric acquisition
Get in touch with Nash Advisory’s business mergers and acquisitions team for bespoke advice and strategies to secure your business’s future.
The vertical acquisition
Vertical acquisitions occur when a parent company acquires a related target company that operates as a link in the same supply chain.
For your acquiring business, the benefits are clear.
- You have greater control over the supply chain, reducing the risk of a breakdown and gaining your independence in the market.
- Taking control of the existing supply chain means you don’t have to spend capital creating infrastructure from scratch.
- Not only do you gain infrastructure, but you may also gain the expertise of the experts involved if you incentivise them to remain.
- In the long term, you can optimise your businesses to improve efficiency and reduce costs.
You can acquire businesses higher or lower on the supply chain than your business. For example, you may choose to purchase the producers of the raw materials you use for manufacturing, or you may decide to purchase the store that sells your product.
Example of a vertical acquisition
A reusable bottle manufacturer wants to gain control of their supply chain to improve their stability.
They decide to purchase a company that manufactures metal straws, which the bottle manufacturer uses in their products.
After the acquisition, they are able to reduce the unit cost of the metal straws, thereby lowering their overall unit cost. They can also choose to stop selling metal straws to their competitors, or to use their new infrastructure to sell metal straws and like products to non-competing companies in other industries, thereby generating a new source of income.
The horizontal acquisition
Horizontal acquisitions occur when a company purchases a business entity within the same industry. The purchased business is not part of the acquiring business's supply chain; therefore, the acquisition isn’t vertical but horizontal.
Through a horizontal acquisition, your business can eliminate competition. By acquiring smaller companies, you may even be able to stop them from developing into a market threat at all.
But there is a significant risk: buying out your competition can catch the attention of antitrust regulators, and you can face severe consequences if their rulings don’t go your way. But horizontal mergers and acquisitions are not inherently illegal; you will need a strong business advisor to ensure that you are targeting appropriate businesses and acquiring them in the right way.
Example of a horizontal acquisition
In the lead-up to Christmas, a highly successful plastic Christmas tree manufacturer worries about a new competitor whose quality products may steal market share.
The owners of the Christmas tree business decide to buy their competitor; they feel this would be a more prudent course of action than differentiating their own product, as the competitor’s product would be a new offering they could sell, and their newly acquired business could improve their manufacturing output and economies of scale.
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The conglomerate acquisition
A conglomerate acquisition occurs between companies of two entirely separate industries. The two companies do not have to offer similar products, nor do they necessarily target similar markets. Diversity is actually critical to the acquiring company; by having a foothold in multiple industries, they safeguard themselves against market volatility in either one.
The benefits of a conglomerate acquisition can flow towards both companies involved; for the target company staff that remain, the parent company’s successes are now their bolster during any weaker periods they themselves may face.
Example of a conglomerate acquisition
A music instrument manufacturer realises they need to diversify their products to safeguard their company. They decide the best way to do that would be to acquire a business in a totally separate sector.
Since they already have the manufacturing infrastructure, raw material sources and experts to create metal products, they decide to acquire a business that makes automobiles. The shared knowledge between the businesses allows them to streamline both and strengthens their positions in their respective industries.
The congeneric acquisition
Congeneric acquisitions occur when a company acquires another company that targets the same market. The target company does not have to operate within the acquiring company’s supply chain, as in a vertical acquisition, nor do they have to sell similar products, as in a horizontal acquisition.
The goal of a congeneric acquisition is often to create synergies, such as economies of scale or cross-selling opportunities, that can result in operational efficiencies and cost savings.
Example of a Congeneric acquisition
A nappie manufacturing company decides to gain more of the parenting market. They find that the best way to do this is to purchase a baby food company. The products they now sell don’t compete with one another but strengthen the larger company’s overall position in the market.
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Preparation is the key to a successful acquisition
There are risks to every type of business merger or acquisition:
- Clashes of culture, processes and systems can disrupt operations or cause senior and specialist employees to leave.
- If the two companies are too similar, they may find the acquisition has duplicated their resources. These redundancies decrease efficiency, and getting cutting them jeopardises people's jobs.
- Without a clear debt management plan, as well as a plan to develop the target company, the acquiring company can find itself drowning in debt.
