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For companies looking to enter new markets, expand, or strengthen their capabilities, a merger or acquisition can make sense. Not all these deals look the same, however, and understanding the different types of mergers and acquisitions (M&A) is crucial to make the right decision.
Explore the main merger and acquisition strategies, their implications, and how each approach can impact the businesses involved.
Merger vs. acquisition: What’s the difference?
To fully grasp the meaning of M&A in business, it’s important to distinguish between its components. While M&A is often used as a catch-all term, the two approaches have different structures, strategic goals, and outcomes. Both can help companies achieve economies of scale and grow customer bases, but the balance of power looks very different. Here’s an overview of each.
What is a merger?
A merger occurs when two companies agree to combine into a single legal entity. These are usually mutual agreements—sometimes called “mergers of equals.” The goal is to consolidate resources, streamline operations, and reduce costs while blending leadership and governance structures. Mergers often involve restructuring and rebranding, subject to board and regulatory approval. A well-known example is the 1999 union of oil enterprises Exxon and Mobil to form ExxonMobil corporation.
What is an acquisition?
An acquisition happens when one company takes control of another, usually a larger firm purchasing a smaller one. The acquired company may continue to operate as a subsidiary—as Instagram did under Facebook, or LinkedIn under Microsoft—or the parent company may fully absorb it.
Acquisitions can be friendly, when both boards agree, or hostile, when the acquirer bypasses leadership and appeals directly to shareholders. A classic hostile takeover was InBev’s 2008 purchase of Anheuser-Busch.
Types of mergers and acquisitions
M&A takes different forms depending on company goals, industry position, and market conditions. Here are six of the most common types.
1. Horizontal merger
A horizontal merger occurs when two companies in the same industry and at the same production stage combine to increase market share and reduce competition.
- Benefits: These mergers lead to enhanced efficiency through economies of scale and a stronger market position.
- Downsides: Horizontal mergers may be subject to high regulatory scrutiny over potential monopolistic practices and structural and cultural integration challenges.
- Example: The 2008 merger of Sirius and XM Radio combined two direct competitors in satellite radio.
2. Vertical merger
Vertical mergers involve companies at different stages of production or within related supply chains, such as a clothing manufacturer merging with a textile supplier.
- Benefits: This type of merger often results in lower costs, increased efficiency, and tighter control.
- Downsides: Vertical mergers can bring about antitrust concerns and operational complexity when combining different business models.
- Example: Disney’s 2006 acquisition of Pixar strengthened its position in the animation industry and expanded its creative portfolio.
3. Market-extension merger
A market-extension merger happens when two companies selling similar products or services in different markets join forces to expand reach.
- Benefits: These mergers provide access to new geographic markets, broader customer base, and revenue diversification.
- Downsides: Integrating leadership and marketing strategies can be difficult, and cultural misalignment may undermine success.
- Example: Daimler-Benz’s 1998 merger with Chrysler sought to expand each automaker into new markets but ultimately failed due to cultural and operational clashes.
4. Product-extension merger
A product-extension merger combines companies that sell related but not directly competing products, expanding market coverage and product lines.
- Benefits: This type of merger often leads to a larger product portfolio, more cross-selling opportunities, and greater market presence.
- Downsides: There is the risk of brand dilution and the potential cannibalization of existing products.
- Example: Google’s 2005 acquisition of Android extended its ecosystem into mobile operating systems, strengthening its position in the mobile market.
5. Conglomerate merger
A conglomerate merger occurs when companies from unrelated industries combine, typically to diversify operations and reduce risk.
- Benefits: Conglomerate mergers usually mean lower dependence on a single market, revenue diversification, and the potential for cross-industry innovation.
- Downsides: There can be limited synergy between unrelated businesses and a mismatch in workforce skillsets.
- Example: General Electric’s 1986 acquisition of NBC gave the industrial enterprise a foothold in the entertainment industry, diversifying beyond manufacturing.
6. Acqui-hire
An acqui-hire happens when a larger company acquires a smaller one mainly for its workforce rather than its products or services. This approach is particularly common in the tech industry, where highly specialized talent can be scarce, as it quickly brings in skilled teams without the delays of traditional recruiting.
- Benefits: This type of merger offers fast access to specialized talent with reduced recruitment costs and timelines.
- Downsides: There is the risk of high employee turnover post-acquisition, cultural mismatches, and little long-term value from the acquired company’s products.
- Example: Facebook’s acquisition of startup company Sofa allowed it to strengthen its team with proven professionals, while the acquired product itself played little role in the company’s long-term strategy.
Vertical vs. horizontal: Key differences
The motivation behind vertical and horizontal mergers varies based on the companies’ relationship and strategic goals. Here’s how these two types of mergers compare.
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About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
