10 Types of M&A transactions: Definitions and real-world examples

In today’s competitive business environment, mergers and acquisitions (M&A) are a powerful tool for companies seeking to expand operations, grow market share, improve product offerings, or diversify risks. They have high success rates — 70% create value.

However, with many types of acquisitions, each serving specific goals, selecting the right approach can take time. This article covers the main types of mergers and acquisitions and gives real-world examples, helping executives choose the best strategy for long-term growth.

Horizontal merger

A horizontal merger happens between two companies in the same industry that offer similar products and services. Horizontal mergers between direct competitors often consolidate market power and eliminate competition. Here are common strategic reasons to acquire a company in the same industry:

• Reduced market competition
  A greater market share allows the combined entity to have more influence on price formation, supply chains, and customer loyalty.
• Economies of scale
  These can be gained when business entities combine departments, leverage shared resources, integrate operations, and consolidate human capital. This allows for greater production input and lower cost per unit.
• Market expansion
  Horizontal mergers help companies expand to new areas of the same market. The companies involved can leverage each other’s distribution networks, brand recognition, and customer bases.

Horizontal merger example: Raytheon Technologies

The 2020 merger of equals between Raytheon Company and United Technology Corporation is an example of a horizontal merger. Both companies operated in the aerospace industry, offering hypersonic technology, avionics, directed energy, and cybersecurity solutions. At the time of the merger, the new business entity, Raytheon Technologies, had over $74 billion in pro forma net sales and 195,000 employees.

Vertical merger

A vertical merger takes place between two or more companies who operate at different stages of the production process. Vertical mergers may occur between suppliers and manufacturers, manufacturers and distributors, and vendors. Some common reasons for vertical mergers include:

• Cost reduction
  Merging with suppliers or distributors helps companies optimize supply chains, production, and distribution processes. Owning more of the process helps lower production costs.
• Access to new markets
  Controlling distribution networks improves access to new markets and customer segments. The new company can expand its geographical reach and position its offerings better.
• Supply chain control
  Merging with suppliers gives companies greater control of supply delivery times, inventory management, and production quality. This reduces the dependence on external suppliers and mitigates the potential impact of supply chain disruptions.

Vertical merger example: Disney and Pixar

The 2006 merger between Disney and Pixar is a typical vertical merger between a distributor and a manufacturer. Disney, an entertainment company (media distributor), acquired Pixar, an animation studio (content producer), ensuring more effective distribution of Pixar’s movies across media channels. Disney could capitalize on Pixar characters through advertising, amusement parks, wireless channels, and digital platforms.

Congeneric merger

A congeneric merger (also known as a concentric merger) takes place between two or more companies from the same or related industries whose offerings complement each other . Congeneric mergers typically occur between indirect competitors who, when merged, benefit from an extended product range. Here are the reasons for congeneric mergers:

• Market expansion
  Congeneric mergers allow for expanding to adjacent markets. The combined company can sell to a broader range of customers without directly challenging competitors in its primary market.
• Revenue opportunities
  Complementary offerings create an opportunity for cross-selling, improving value proposition, customer loyalty, and revenue.
• Product diversification
  Congeneric mergers allow companies to diversify product offerings, improving resilience amid shifting market trends and consumer demands.

Congeneric merger example: CVS Health and Aetna

The 2018 merger between CVS Health and Aetna is an example of a deal between health companies that offer complementary products to the same customer base. CVS Health sells pharmacy products, while Aetna offers health insurance services. Valued at $69 billion, the merger gave the new entity more market power, greater influence over medical prices, and a revenue boost through extended health insurance plans.

Conglomerate merger

A conglomerate merger occurs between two or more companies in entirely different industries. Conglomerate mergers are typically driven by the desire to diversify business portfolios. Here is why companies might pursue conglomerate mergers:

• Risk diversification
  Conglomerates can reduce the merged entities’ exposure to market fluctuations and economic downturns. A well-diversified conglomerate may be more resilient to economic headwinds in one industry because its other businesses in better-performing sectors may stabilize its overall financial performance.
• Global expansion
  Conglomerate mergers can help companies establish market dominance without directly competing in particular industries. By entering new, unrelated markets, a company can broaden its reach and improve its financial performance.
• Better investment opportunities
  Well-diversified companies may become more attractive to investors who aim to spread risk. This can help conglomerates improve access to capital and boost stock performance.

Conglomerate merger example: Amazon and Zoox

The 2020 merger between Amazon and Zoox is a conglomerate acquisition. Amazon, which originally started as an online bookstore, has grown into a conglomerate with an extensive portfolio of businesses in e-commerce, cloud computing, artificial intelligence, and more.

The acquisition of Zoox, a self-driving vehicle company, is a conglomerate deal because Zoox operates in a different industry to Amazon. This opens growth opportunities for Amazon in this new market, broadening its market power, helping it remain one of the biggest companies in the world.

Market-extension merger

A market extension merger occurs between two or more companies in the same industry but in different geographies. It can either take place between country-level competitors or companies that offer similar products but operate in different parts of the world. Here’s why you’d consider a market expansion merger:

• Geographical expansion
  Market extension mergers allow companies to target new audiences and expand their global footprint.
• Faster market penetration
  Expansion mergers help companies enter new markets quickly and leverage the acquired companies’ distribution networks, supply chains, and branding.
• Reduced competition
  Joining forces with a similar company in a different region helps to concentrate market power and reduce competition.

Market extension merger example: Heineken

Heineken is a Dutch multinational brewing company. Its acquisition of Distell and Namibia Breweries is a market-extension merger. Distell and Namibia Breweries are two major players in South Africa, which opened a path to further expansion for Heineken in the African region. Distell and Namibia Breweries merged with Heineken South Africa and were rebranded as ‘HEINEKEN Beverages.’

Product extension merger

A product extension merger happens when companies from the same or related industry combine product lines. A product extension merger can be classified as a subtype of the congeneric merger because it’s very similar in its core motivation:

• Extending products and services
• Creating cross-selling opportunities
• Expanding a customer base
• Improving market share

The line between product extension and congeneric mergers is often blurred, particularly when the merging companies have both complementary and distinct product offerings that cater to the same audience. As a result, product extension and congeneric merger terms can be used interchangeably.

Product extension merger example: HPE and Juniper Networks

Hewlett Packard Enterprise (HPE) announced the $14 billion acquisition of Juniper Networks in January 2024. While HPE offers many networking solutions, including routers and cloud management software, it also benefits from Juniper Networks’ AI networking solutions. Both companies cater to enterprises, data centers, and cloud providers. This deal bolsters HPE’s product portfolio with Juniper’s innovative solutions.

Statutory merger

A statutory merger occurs when only one company, which is the acquirer, retains its legal entity after the transaction. In this type of direct merger, the newly combined entity ‘inherits’ the acquiring company’s name. The target company can become a subsidiary of the acquiring company, or its brand may be completely discontinued, depending on the acquirer’s business strategy.

Unlike horizontal, vertical, conglomerate, congeneric, product extension, or market extension mergers that represent strategic intention, a statutory merger is more involved with the legal formalities of the transaction as it involves the legal dissolution of the target company and the transfer of its assets and liabilities to the acquirer.

Statutory merger example: T-Mobile and Sprint

The 2020 merger between T-Mobile and Sprint was statutory. T-Mobile survived and absorbed Sprint. After the merger, the Sprint brand was discontinued, and its store locations were rebranded as T-Mobile’s.

Web advertising also transitioned to the T-Mobile brand. However, existing Sprint customers underwent a phased transition in direct communications, where T-Mobile representatives reflected the ‘combined entity’ brand rather than T-Mobile for a time.

Triangular merger

A triangular merger occurs between an acquirer’s subsidiary and a target company. The merger is named triangular because there are three entities in the transaction:

• The acquiring company
  The company that initiates the transaction.
• The merger subsidiary
  A shell company with no real business operations which is specifically created for legal and structural simplicity of the merger. It’s also known as Merger Sub.
• The target company
  The company that is being acquired.

The outcome of the triangular merger depends on its type:

• Forward mergers
  The target company merges with and into the Merger Sub. The Merger Sub survives, while the target company is discontinued.
• Reverse mergers
  The Merger Sub merges with and into the target company. The target company survives, effectively replacing the Merger Sub.

There are several reasons for triangular mergers:

• Approval simplicity
  The parent company is the sole shareholder of the Merger Sub, which simplifies decision-making and eliminates the need for approval from the parent company’s shareholders. 
• Tax benefits
  Triangular mergers can qualify as tax-free reorganizations under Section 368 of the U.S. Internal Revenue Code, allowing target shareholders to defer capital gains taxes.
• Liability containment
  Employing a merger subsidiary helps shield the parent company from the target company’s liabilities.

Triangular merger example: Dell and EMC

The 2016 merger between Dell and EMC represents the reverse triangular merger where the target company survives and becomes the acquiring company’s subsidiary. Upon the terms of this merger agreement, EMC Corporation (target company) was merged with Universal Acquisition Co., (merger sub), a wholly owned subsidiary of Denali Holding (a holding company that conducts operations through Dell). Universal Acquisition Co. ceased to exist, while EMC survived.

The two primary M&A structures: Share purchase vs asset purchase

A merger may be structured as a share acquisition or asset purchase, each with distinct characteristics and implications. The choice between these M&A structures depends on factors like the desired level of control, assumption of liabilities, and complexity of integration.

Share (or interest) acquisition

In the share (stock) acquisition, the acquiring company purchases an ownership interest in the target company, as represented by its shares (stock). Here are the key characteristics of stock purchases:

• Full ownership transfer
  The ownership of the target company transfers to the acquiring company. The target’s shareholders may receive shares in the acquiring company. It’s also common for the target company’s shareholders to receive cash compensation in return for no further interest in the sold business.
• Assumption of target liabilities
  Since the target company is owned by the acquiring company, the acquiring company assumes all its liabilities (known and unknown).
• Business continuity of the target
  Due to full ownership transfer, the target’s contracts, agreements, and business licenses remain intact. This ensures operational continuity and gives the acquirer more flexibility in integration-related decisions.

Share (stock) acquisition example: ADM and Xilinx

ADM’s acquisition of Xilinx represents a stock purchase transaction where Xilinx shareholders were paid 1.7234 AMD shares for every share they held. The transaction also included cash paid for fractional shares of Xilinx.

As a result of the merger, Xilinx shareholders became shareholders of ADM, and the combined company’s total addressable market (TAM) grew to $135 billion. The Xilinx brand was discontinued and the company was renamed to Adaptive and Embedded Computing Group (AECG).

Asset purchase

In an asset purchase, the acquiring company buys selected assets from the target company. Because the acquiring company doesn’t purchase the target company’s stock, the target company remains a separate company.

This method allows the acquiring company to purchase desired components of the target company without assuming the full spectrum of its liabilities. This is how corporate acquisitions are structured as asset purchases:

• Selective ownership transfer. Instead of acquiring the entire company, the buyer purchases selected assets, such as equipment, intellectual property, or business units.
• Integration of assets. Asset integration can be more complex than a stock acquisition from a contractual perspective. Licenses and contracts must be reassigned.
• Selective liability assumption. The acquiring company leaves the target company with liabilities not included in the transaction. This helps acquirers avoid certain obligations, reducing the risks of the transaction.

Asset purchase example: Microsoft and Nokia

Microsoft and Nokia agreed to purchase Nokia’s devices and services business. Microsoft acquired Nokia’s devices and services business for €3.79 billion and Nokia’s patents for €1.65 billion, for a total purchase price of €5.44 billion. At closing, Nokia transferred several business units to Microsoft, including operations related to Nokia Lumia production and approximately 32,000 employees.

The bottom line

• The main types of M&A transactions include horizontal, vertical, congeneric (concentric), conglomerate, marker extension, and product extension.
• Statutory and triangular mergers refer to specific legal structures. A statutory merger is when the target company’s legal existence ceases. A triangular merger refers to a structure in which the target company is merged with the blank subsidiary of the acquiring company.
• Mergers can be structured as stock and asset acquisitions where acquiring companies purchase stock (ownership interest) or individual assets of target companies.

Understanding different types of acquisitions can help businesses make informed strategic decisions. For example, a horizontal acquisition is the best for increasing market share, while a vertical acquisition can enhance supply chains.