It is a phrase straight out of a cartoon businessman’s mouth “I have to look at the mergers and acquisitions.” Maybe Monopoly Man can get away with dropping “mergers and acquisitions”, but the average person doesn’t really understand the meaning. Read on to learn what mergers and acquisitions are, as well as the different types and how they might be used by a small business.
Mergers
The simplest way to define a merger is when two or more business entities become one entity. The surviving entity could swallow up one or more of the businesses. Or become a blend of those businesses. Businesses can merge for a number of reasons. Mergers involving small businesses are usually very simple and straight-forward but at times can be extremely complex. Mergers involving large businesses, on the other hand, will almost always be complex.
Acquisitions
An acquisition typically refers to a business purchase. It can refer to a purchase of the business assets or a purchase of the business entity itself. A business purchase can be both a merger and an acquisition if multiple businesses are involved. An acquisition can be the purchase of a partial interest of the business or the entire interest. Most small business acquisitions involve the purchase of business assets only, because purchasing another entity usually involves a lot more risk. And a lot of unknowns.
Common Types Of Mergers And Acquisitions
Conglomerate Merger/Acquisition
A conglomerate merger or acquisition happens between two entities that are in two entirely different fields of competition. For example, if Disney and Coca Cola decided to merge. The two companies would maintain their same competitors separate from one another. Conglomerates oftentimes happen because one company is trying to branch into a completely different field.
Horizontal Merger/Acquisition
Horizontal mergers or acquisitions happen between companies within the same industry who share or compete for a customer base. A potential example of this is if Coca Cola and Pepsi merged together or one acquired the other.
Mergers of this nature often occur in highly competitive markets with relatively few firms. A merger in this environment allows for greater market control. Acquisitions of this nature also happen in a highly competitive market, but they represent one business winning out over another one.
Vertical Merger/Acquisition
A vertical merger or acquisition occurs when companies within the same industry that serve two different purposes merge or acquire one another. Usually this represents a move by a larger company to control the supply chain of a final finished product. For instance, if Coca Cola started buying up sugarcane farms in order to control the sugar that goes into their drinks.
Coca Cola is not in competition with sugar farms, but acquiring the farms lowers the cost of supplies for the company. Additionally, it gives Coca Cola the opportunity to make money off of their competitor Pepsi, who also needs the sugar.
In merger situations, this happens because the sum of the companies’ parts is greater that the combined value of their separate products.
For Assistance With Mergers And Acquisitions
Dowd Law can help you evaluate a potential merger and identify risks. As well as offer options and solutions. Let us help identify what you need for a successful merger or acquisition.
Additionally, Dowd Law can help you with a business sale, business purchase, asset purchase, and stock purchase.