Commonly abbreviated to M&A, mergers, and acquisitions are among the most well-known and common ways for companies to expand. In layman’s terms, a merger or acquisition is when one company is absorbed by another or when two companies combine. The more business savvy definition of the terms would be a consolidation of either companies or assets.
In this article we’ll look at the five types of mergers, and explain the difference between merger and acquisition transactions.
What is the difference between a merger and an acquisition?
The main difference between merger and acquisition transactions stems from which company ends up in control of the new entity. If one company purchases another and establishes itself as the new owner, this transaction is called an acquisition.
A merger describes two companies of relatively the same size that join forces and move forward as a single entity. A merger typically occurs when two CEOs agree that joining forces is in both of their best interests.
5 Types of Mergers
There are five types of mergers: vertical mergers, horizontal mergers, conglomerate mergers, market extension mergers, and product extension mergers.
- Vertical merger: A vertical merger is simply the combination of two companies that provide the same products or services. This is typically done to bring together different supply chain functions that the companies operate with. When it comes to the different types of mergers and acquisitions, the vertical merger is the most common and simple.
- Horizontal merger: Horizontal mergers are very similar to vertical mergers; except they operate between two or more companies that are considered competitors. Horizontal mergers are most common in industries that don’t have many businesses offering the same product or service.
- Conglomerate merger: Any merger or acquisition between two companies that engage in completely unrelated business activities is considered a conglomerate merger.
- Market extension merger: A market extension merger is a merger between two companies that offer a similar product or service but in different markets. Companies do this to increase their market share and grow their customer base in new markets. When looking at the different types of mergers and acquisitions, market extension mergers are the most likely to occur between businesses from different countries.
- Product extension merger: Product extension mergers are one of the more basic types of mergers and acquisitions. This is simply a merger between two companies that offer a similar product or service in the same market. Product extension mergers are often done to merge products together, share technology, ideas, and expertise, and grow their customer base.
How Mergers and Acquisitions can be Financed
All these different types of mergers and acquisitions are typically financed – at least in part — by a company’s existing cash reserves; however, it is not uncommon for a company to take out a loan in order to buy another company with cash, stock, or assumption of debt.
If you’re in need of a loan to finance a merger or acquisition, look no further than Jumpstart Finance. With more than 30 years of experience guiding borrowers through the lending process for both growth and acquisition, there’s no better partner than Jumpstart Finance. Contact us today!