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Written By Matt Perkins

Published February 4, 2025

Updated February 4, 2025

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Types Of Mergers And Acquisitions

Business owners, entrepreneurs, or founders planning to make an exit or be absorbed by a company with the goal of expanding their operations should understand the different structures or types of M&A so they can make informed decisions regarding the upcoming deal. The following sections will feature the types of mergers and acquisitions as well as the deal structures.

Types of M&A

Mergers and acquisitions come in many forms, each designed to meet different business goals and fit the individual cases of both sides. These differences in structure and purpose offer unique benefits, and the goal will always be to serve both the interests of the buyer and seller.

Just as there are many motivations to enter into a deal, the types of M&A transactions are also diverse, with factors ranging from business succession planning, such as a desire to retire, to a strategic decision to focus on a new venture. Understanding these motivations not only sets realistic expectations but can also help identify the best type of M&A that is suitable for both companies.

The main types of m and a can broadly be divided into strategic acquisitions and financial acquisitions. Strategic M&A types are usually pursued by companies aiming to enter a new market, gain access to a fresh customer base, or acquire specialized technology or intellectual property. 

Accelerated growth within the industry is the main benefit of a strategic acquisition, because the acquirer bypasses the lengthy process of building out new capabilities from scratch. 

In contrast, financial acquisitions — with private equity firms often at the helm — will always aim for solid returns. These firms will always look for methods to push profitability further, whether it’s by business operations optimization or cash flow maximization.

For small business owners weighing their options, understanding the range of M&A deals available can be tremendously helpful. With knowledge like this at their disposal, what buyers want becomes clear, and they can make all the preparations that will deliver to attain what they’ve been aiming for.

Mergers

A merger is like a business partnership where two companies come together to form a single, stronger entity. Usually, the process starts when the boards of directors from each company give their nod to the merger idea. They then reach out to their shareholders for their approval. Mergers are often viewed as a partnership that allows both companies to harness their strengths, reduce competition, and grow their market presence. For instance, if two businesses in similar industries merge, they can combine resources, streamline operations, and perhaps reach a broader customer base.

A good example would be a local bakery and a popular coffee shop teaming up—together, they could offer a fuller experience to their customers while sharing costs and resources.

Acquisitions

Acquisitions occur when one company takes control of another by purchasing a majority stake in its shares or assets. This transaction often results in the acquired company ceasing to operate independently.

For small business owners, gaining an understanding of acquisitions can point toward significant growth opportunities. When a company successfully acquires another, it’s a win-win situation. The acquiring company gains access to exciting new products, services, and a larger customer base, which helps it to grow and thrive in a competitive market.

The impact on organizational structures can vary widely. In some cases, the acquired company maintains its name and operates as a distinct entity under the new ownership. Its brand identity is retained, yet it has access to the resources of the larger company. The acquisition might also lead to a complete merger, where the original company’s structure is fully absorbed, and its identity disappears. An acquirer who sees the deal as a strategic move that will cement their position within the industry will push through with the deal. Understanding this process can help business owners navigate their own growth strategies more effectively.

Consolidations

Consolidations refer to the process where two or more businesses come together to form a single, new entity. This can often lead to enhanced efficiency and profitability, making it an appealing strategy for many business owners. One of the primary goals of consolidations is combining core businesses to strengthen market position and streamline operations. 

For instance, when larger companies like Facebook acquire smaller competitors such as Instagram, they not only expand their market reach but also eliminate potential competition. These moves allow them to harness shared resources and expertise, ultimately benefiting their bottom line. For small business owners, understanding consolidations can illuminate strategic opportunities for growth and collaboration in their own ventures.

Tender Offers

Tender offers can be a valuable option for business owners looking to understand ways to buy or sell shares at a clear, predetermined price. In a tender offer, one company proposes to purchase the outstanding stock of another company at a specific price, which is usually set above the market price. This is done to make the offer attractive to shareholders, as they get the chance to sell their shares at a premium. Importantly, the offer goes directly to shareholders—bypassing the board of directors and management—allowing shareholders to make the decision themselves.

For instance, imagine Company A wants to acquire shares of Company B. Company A might extend a tender offer directly to Company B’s shareholders, specifying a price they are willing to pay per share. Shareholders then decide if they want to sell their shares at this set price. Tender offers are often seen as a direct approach to gaining control of a company, particularly when the buying company wants to secure a significant stake quickly and with fewer hurdles. This process can provide shareholders with liquidity (cash in hand) and allow the acquiring company to secure investment without having to negotiate extensively with management or other intermediaries.

Acquisition of Assets

Acquisition of assets is when one company purchases specific assets from another rather than buying the entire company. This type of acquisition is often chosen because it allows the buyer to select exactly what they want, such as equipment, inventory, or intellectual property, without taking on the full business. 

One important aspect is that this process requires shareholder approval from the company selling the assets. This means the current owners or shareholders of that company must agree to the sale terms. For small business owners considering selling certain assets, this kind of transaction can be beneficial as it’s often more tailored, with less risk of inheriting unwanted obligations, but it can also require a bit more negotiation to get all parties on board.

Management Acquisitions or Management Buy Out (MBO)

A management acquisition, often referred to as a management-led buyout (MBO), happens when the company’s own leadership team decides to buy a controlling stake in the business. This type of acquisition can be an appealing route for owners considering retirement or simply looking to transition ownership to a familiar and committed team. The MBO approach allows the current management, who already understand the company’s operations, to step up and take ownership, ensuring business continuity.

These transactions usually involve a mix of financing, including personal investment from the management team and loans. Lenders are often supportive because the managers already know the business well and are motivated to see it succeed. By securing a controlling stake, the management team can use their expertise to grow the business under their own vision and standards. This setup not only provides stability for clients and staff but also presents a clear future for the company under trusted leadership.

For business owners, a management-led buyout can be a smooth and practical transition, offering confidence that the company will stay in good hands.

Horizontal Acquisition

A horizontal acquisition, a specific type of acquisition in the M&A (mergers and acquisitions) landscape, involves one business acquiring another that offers similar products or services and operates within the same industry. Think of it as joining forces with a competitor to strengthen your standing in the market. For small business owners, this type of acquisition is all about boosting resources and influence without the learning curve of entering a brand-new industry.

One of the biggest benefits of a horizontal acquisition is expanding the customer base. By absorbing a competitor’s clients, the acquiring business immediately broadens its reach, which can be especially valuable if the acquired company has a strong following or operates in a geographic area the buyer hasn’t yet tapped. Plus, by combining operations, the newly merged company can achieve a larger market share, potentially standing out more significantly against other competitors in the field.

Another advantage is the potential for reduced costs. With greater economies of scale—think bulk purchasing power and streamlined operations—the combined company can often lower production and operational expenses. Ultimately, a horizontal acquisition is a type of M&A strategy that can drive growth in a way that’s both straightforward and impactful, especially for companies aiming to expand their influence within their own industry.

Vertical Acquisition

Vertical acquisitions are a type of M&A deal where a company buys another business that operates in the same industry but at a different step of the production process. Think of it like strengthening your business’s foundation by adding essential parts to the overall structure—whether it’s securing raw materials, gaining more control over the distribution, or accessing necessary technology. This type of acquisition can be a strategic move for small and medium-sized businesses looking to grow sustainably and reduce dependencies on third parties.

A primary advantage of vertical acquisitions is the potential to streamline operations and lower production costs. By bringing a supplier, distributor, or complementary service in-house, your business can avoid the usual markup from outside vendors and gain control over a larger part of the production journey. For instance, if your business manufactures a product, acquiring a key supplier could mean having a steady flow of materials and lower costs of production. This type of acquisition also helps safeguard your business against unpredictable external factors that might otherwise cause production delays.

Another benefit is the ability to integrate different stages of production under one roof, making your business more efficient and less dependent on third-party providers. By controlling more of the supply chain, you can also focus on consistent quality and reliability—two factors that can enhance customer trust and long-term growth.

So, if you’re considering M&A deal types, a vertical acquisition could be a smart move to explore. It’s not just about expanding; it’s about building a stronger, more resilient business from the ground up.

Conclusion

Mergers happen for various strategic reasons, often tied to the growth goals of the companies involved. By merging, businesses can gain access to new markets, enhance their competitive advantage, or achieve economies of scale. The types of M&A deals and the types of mergers and acquisitions reflect these goals, ranging from horizontal mergers, which increase market share by combining similar companies, to vertical mergers that streamline supply chains. Ultimately, mergers and acquisitions allow companies to harness shared strengths, improve profitability, and respond more effectively to industry demands, ensuring they stay competitive and innovative in a rapidly evolving market.

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