When companies aim to grow, they often consider mergers and takeovers. These are both types of business transactions, and the terms are often used interchangeably, but they're not quite the same thing. In this guide, we'll walk you through the key differences between mergers, takeovers and the processes they follow.
What is a merger?
A merger happens when two companies agree to combine their resources, operations and assets to form a single entity. Mergers are typically mutual agreements between companies, designed to benefit both parties. The idea is that the single entity will be more competitive and efficient than two separate companies. The process often results in shared management, ownership and even branding. For example, two companies in the same industry may merge to dominate a market sector.
💡Editor's insight
"I see a lot of people also use the term acquisition along with mergers. They're also similar but not the same. Here's how it works - a merger is when two companies are more or less equal in size and come together. And an acquisition is where one company is larger than the other and ends up owning the other."
Types of mergers
Mergers can take various forms, and each type has a specific purpose. Here are some of the most common types of mergers in the UK.
Horizontal mergers
A horizontal merger happens when two companies operating in the same industry combine forces. These mergers are often motivated by a desire to consolidate market share and reduce the competition.
The ultimate goal: To reduce the competition and increase market share.
Real-life example: The merger of Exxon and Mobil in 1999 is a classic horizontal merger example, where two major oil and gas companies joined to strengthen their position in the global energy market.
Advantages ✅ | Challenges ❓ |
|---|---|
It can enhance market power by reducing direct competition | Higher regulatory scrutiny, as horizontal mergers can reduce competition and create monopolies |
It can create opportunities for cost savings through shared resources | Culture clashes can happen if the companies have different workplace environments |
It can increase a customer base and create a stronger market presence |
Vertical mergers
A vertical merger involves companies at different stages of the same supply chain. They often take place between a manufacturer and a supplier that complement each other well. The ultimate goal is to enhance operational efficiency, reduce costs and gain greater control over the supply chain.
The ultimate goal: To improve efficiency and cut business costs.
Real-life example: The acquisition of Time Warner by AT&T in 2018 is a vertical merger, where a telecommunications company (AT&T) combined with a media content producer (Time Warner) to control both content creation and distribution.
Advantages ✅ | Challenges ❓ |
|---|---|
It can improve supply chain coordination which can lead to cost reductions | High initial costs for integration |
It can create greater control over production and distribution processes | Risk of alienating existing suppliers or distributors who may feel side-lined |
It can give a business the ability to offer more competitive pricing or unique products |
Conglomerate mergers
A conglomerate merger is where one big company acquires a number of smaller companies. There are two types of conglomerate mergers: pure and mixed. Pure is where two companies with no overlapping markets or products decide to merge. Meanwhile mixed is where two companies might have similar primary goals.
The ultimate goal: To diversify business operations.
Real-life example: The merger of Walt Disney Company and ABC in 1996 brought together a major entertainment company and a broadcast network, diversifying Disney’s portfolio.
Advantages ✅ | Challenges ❓ |
|---|---|
It can create a diversification of markets or products | Managing diverse businesses can be complex |
It can increase market opportunities across different industries | Limited synergies between unrelated industries may reduce cost-saving opportunities |
It can enhance brand recognition |
Market-extension mergers
Market-extension mergers happen when companies selling similar products or services in different geographic regions combine. The primary aim is to expand the customer base and access untapped markets.
The ultimate goal: To increase reach and expand in other markets.
Example: The merger of Anheuser-Busch and InBev in 2008 expanded the reach of both companies into new international markets.
Advantages ✅ | Challenges❓ |
|---|---|
It can provide access to new customer segments | Adapting to different market regulations, cultural expectations, and consumer preferences |
It can help leverage the existing brand in a broader market | There can be integration challenges for operations across diverse geographic areas |
It can increase revenues and market share across diverse regions |
Product-extension mergers
A product-extension merger involves companies that produce complementary products or services coming together. The goal is to expand the product range and appeal to a broader customer base.
The ultimate goal: To diversify products and offer more to a customer base.
Real-life example: Procter & Gamble’s merger with Gillette in 2005 combined household products with grooming products, creating a diversified portfolio.
Advantages ✅ | Challenges ❓ |
|---|---|
It can create a broader product offering | Integrating different product lines while maintaining quality and branding |
It can improve customer retention by meeting a wider array of needs | Potential overlap in customer bases |
It can create a stronger market position through a more comprehensive portfolio |
Summary of merger types
Type | Description | Key Goal |
|---|---|---|
Horizontal merger | Merging of companies in the same industry at the same production stage | Market consolidation |
Vertical merger | Merging companies at different stages of the supply chain | Supply chain control |
Conglomerate merger | Union of companies from unrelated industries | Market expansion |
Market-extension merger | Companies offering similar products in different markets | Geographic expansion |
Product-extension merger | Companies with complementary products combine | Product range diversification |
What is a takeover?
A takeover happens when one company gains control over another by purchasing a majority stake. It's a type of acquisition where a larger company purchases a smaller one. The acquiring company gains full control over the target’s assets, operations and strategic decisions. There are lots of reasons for takeovers, some motivations include:
Reducing competition
Increasing market share
Appealing to new markets
Accessing new products
Accessing new services
Hostile takeovers explained
Unlike mergers, takeovers are not always consensual and can sometimes be hostile - known as a 'hostile takeover'. This is where one company chooses to buy another despite objections from the board of directors.
💡Editor's insight
"One of the most famous hostile takeovers in history is the acquisition of Cadbury by Kraft Foods in 2008. At the time, the CEO of the Kraft Heinz Company publicly announced an interest in acquiring Cadbury. After several bids, Cadbury eventually relented and allowed the acquisition to happen."
Key differences between merger acquisitions and takeovers
While mergers and takeovers are both methods of corporate restructuring, they have lots of key differences. To recap:
Aspect | Merger | Takeover |
|---|---|---|
Definition | A mutual agreement between two companies to combine | One company acquires control of another |
Nature | Collaborative and consensual | Can be consensual or hostile |
Company size | Typically involves companies of similar size | Usually involves a larger company acquiring a smaller one |
Result | A new combined entity is created | The acquired company is absorbed into the acquiring company |
Learn more about the advantages of mergers and acquisitions in our full guide.
FAQs
What is the main difference between a merger and an acquisition?
A merger is a mutual agreement between two companies to combine as equals, creating a new entity. An acquisition or takeover involves one company assuming control over another.
What is an example of a merger and acquisition?
A classic example of a merger is the union between Disney and Pixar in 2006. An acquisition example is Google’s purchase of YouTube in 2006, where YouTube became a subsidiary of Google but retained its brand identity.
What is an example of a takeover?
A popular example of a takeover is Kraft Foods’ acquisition of Cadbury in 2010. The acquisition was initially met with resistance from Cadbury’s management, making it a hostile takeover. Kraft Foods eventually secured control through an aggressive bidding process.
Do you need a lawyer for a merger or takeover?
Yes, you typically need a lawyer for a merger or takeover to ensure the process complies with legal and regulatory requirements. A lawyer for buying a business provides crucial guidance in drafting and reviewing contracts, conducting due diligence, and addressing potential liabilities or disputes.
Final thoughts
Mergers and takeovers are powerful tools for business expansion and consolidation, but they involve different processes and outcomes. Understanding the nuances between mergers, acquisitions, and takeovers is essential for evaluating their potential impact on a business.
If you need legal advice, we're here to help. Get in touch for a free quote and to see how our corporate law solicitors can help you.
References
Mergers from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.