A business merger is a combination of two or more businesses into one entity. There are many reasons for companies to merge, including expansion of revenue, increased market share and the need to remain competitive in an unforgiving industry (think Kodak). A merger is a complex process and requires thorough planning and execution. A well-thought-out plan will reduce the likelihood of costly mistakes and ensure success.
Business mergers are typically classified as horizontal or vertical, depending on the type of companies involved in the transaction. Horizontal mergers combine companies in the same sector or field of expertise to achieve economies of scale and increase profitability. Vertical mergers combine companies at different stages of the supply chain, such as the $70-billion merger between Aetna and CVS Health to transform the customer healthcare experience.
Another common type of M&A is the management acquisition, also known as a “management buyout,” which occurs when a company’s management team or individuals purchase the company from its current owners. This type of acquisition can give the management team greater rewards and control of the business.
M&A also can include asset purchases, in which the buyer takes over ownership of a target by purchasing its assets. This is often a better alternative to buying a company in its entirety. With an asset purchase, the buyer can cherry-pick specific assets and avoid taking on liabilities that it does not want. However, this type of M&A is not available in all states and may require statutory authorization.