Diversification, economies of scale, fewer competitors… the reasons behind mergers and acquisitions (M&A) vary and call for strategies tailored to the goal. Let's look at the 5 most common M&A strategies and when they are used.
Each of the following strategies has its advantages and disadvantages. Not all of them serve the same goals, which is why you need to understand in detail what each one aims to achieve and when it is most advisable to use it in an M&A process.
Horizontal mergers
Contrary to what you might think, horizontal mergers are not so much about the size of the companies as about their industry. The aim of this process is to increase market share, reduce costs, and improve the competitiveness of both companies by seeking synergies.
An example may make this clearer. When a bank decides to acquire or merge with another, it increases its market share, takes on the other competitor's strengths to reinforce its position, cuts costs by eliminating duplication (branches and jobs), and becomes a potentially more competitive, larger, and stronger institution. Its brand image and presence in certain financial areas are also likely to be strengthened.
Horizontal mergers make sense whenever the goal of the M&A deal is to increase size, gain financial muscle, and raise market share. They can occur in any industry and among companies of any size.
Vertical mergers
Vertical mergers or acquisitions are probably less well known. They take place between companies that operate at different stages of the same supply chain. The aim is to secure materials and inputs, reduce costs, or control sales and distribution. These mergers can go either backward or forward. In other words, a distributor may absorb a supplier, or vice versa.
An example of this type of M&A is when a carmaker buys the company that manufactures one of the components of its cars, such as the batteries. This way, it would ensure that the component is always available and, in addition, make it harder for its competitors to access the batteries.
Conglomerate acquisitions
Third, there are conglomerate acquisitions, which refer to the purchase of or merger with a company unrelated to the core business. This way, the parent company secures a presence in other industries to diversify and reduce its financial risk, as well as to increase profits, expand its customer base, and look for possible future synergies, although the latter is not the main rationale.
Imagine a renewable energy and solar panel company that decides to acquire an organic food and nutritional supplements company. The motivation is to diversify revenue, avoid relying solely on the energy sector, expand into new markets, and explore strategic synergies: both can leverage their image of sustainability and environmental care.
Diversification acquisitions
Although M&A for diversification may look similar to the previous type, there are differences. In this case, the deal involves markets or industries related to the core business, even if they are not in the same line of business. This type of deal seeks synergies to generate shared benefits and improve the range of services or products.
It is common in the tech sector, although not exclusive to it. For example, when a large software company buys one focused on cybersecurity, the parent company comes out stronger by acquiring another company's services. In other words, the synergies here are much greater, and the result is that the parent company diversifies its business and strengthens its position.
Consolidation acquisitions
Here the goal is to combine companies within a fragmented industry to gain market share. It is similar to the first strategy, as it also seeks to create a stronger, more efficient structure and increase market share by eliminating competitors. The difference is that, although they are in the same industry, the companies may not do the same thing.
A typical case is consolidation in the healthcare sector, where groups of small clinics merge with larger hospitals to offer better services and optimize resources.
Although each of these M&A strategies is different, they share common features such as expansion, cost reduction, increased market share, reduced financial or industry-specific risk, and a stronger core business. Which type of strategy to choose will depend on the initial objective you want to achieve when starting an M&A process.
