Companies merge and acquire each other for many different reasons.
From a hostile takeover to a friendly merger or a strategic alliance – there are many ways companies can combine forces.
In this article we look at four of the main types of mergers and acquisitions and provide a mini-case study of a well-known merger that did not turn out as planned.
4 Types of Mergers and Acquisitions
Companies will merge together and acquire each other for a variety of reasons. Here are four of the main ways companies join forces:
Horizontal Merger / Acquisition
Two companies come together with similar products / services. By merging they are expanding their range but are not essentially doing anything new. In 2002 Hewlett Packard took over Compaq Computers for $24.2 billion. The aim was to create the dominant personal computer supplier by combining the PC products of both companies.
Vertical Merger / Acquisition
Two companies join forces in the same industry but they are at different points on the supply chain. They become more vertically integrated by improving logistics, consolidating staff and perhaps reducing time to market for products. A clothing retailer who buys a clothing manufacturing company would be an example of a vertical merger.
Conglomerate Merger / Acquisition
Two companies in different industries join forces or one takes over the other in order to broaden their range of services and products. This approach can help reduce costs by combining back office activities as well as reduce risk by operating in a range of industries.
Concentric Merger / Acquisition
In some cases, two companies will share customers but provide different services. An example would be Sony who manufacture DVD players but who also bought the Columbia Pictures movie studio in 1989. Sony were now able to produce films to be able to be played on their DVD players. Indeed, this was a key part of the strategy to introduce Sony Blu-Ray DVD players.
Case Study – 1998 – Daimler Benz and Chrysler
Daimler Benz bought Chrysler in 1998 and combined to form Daimler Chrysler, a $37 billion automotive giant that had a massive presence both sides of the Atlantic. However, cultural clashes between the two companies were cited as a key reason for the failure that led Daimler to selling Chrysler in 2007 for $7 billion.
In this case, the “efficient, conservative and safe” culture of Daimler clashed with the “daring, diverse and creating” culture of Chrysler. The due diligence work carried up front had not properly assessed the challenge both organisations faced in working with each other.
Also, the transaction was described as a “merger of equals” and this was not the reality within the new organisation. Chrysler had obviously been taken over and there was little trust between the two organisations.
A failure on this scale shows the importance of a thorough and objective due diligence process.
The world of mergers and acquisitions relies heavily on the due diligence process to help assess the viability of a transaction. When billions of dollars are at stake, it makes sense to do all the information gathering and analysis that you can.