There are five commonly-referred to types of business combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger and product extension merger. The term chosen to describe the merger depends on the economic function, purpose of the business transaction and relationship between the merging companies.
A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.
Forming strategic business relationships is a way to enhance the competitive advantage of a minority-owned firms and increase success in securing business that might otherwise go to another supplier. Business relationships take on many forms, from simple contractual relationships to acquisitions. But overall, these relationships are enduring business arrangements falling somewhere on the spectrum between these two extremes.
MBDA Minority Business Development Centers can guide your business into the right arrangement based on your company’s direction, core competencies, and opportunities based on industry.
The types of strategic alliances include:
Simple Contract – This is a basic transaction occurring when a business offer is accepted, and something of value is exchanged. The contract is specific about what is expected by each party and does not obligate the businesses to any future deals.
Open-ended Contract – This arrangement is specific about the terms on which the companies will do business, but perhaps not specific about how much business will be done or when.
Joint Contract – A company can contract with two or more entities to supply goods or services. Typically, two suppliers work very closely together and the contract's primary purpose is to communicate what the client expects of them.
There are many good reasons for growing your business through an acquisition or merger. These include:
Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.
Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity which can be bought at a small premium to net asset value.
Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally.
Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.
Not surprisingly, the pace of merger activity in 2008-09 has slowed dramatically as compared with recent years. Excluding a few megadeals, the M&A world has indeed been quiet. With a weak economy and an ongoing liquidity squeeze, most pundits expect that few significant deals will happen this year—and many think that is exactly the way it should be.
The prevailing view is that acquisitions are a luxury, to be pursued in good times and forsaken in the bad. The prevailing view is completely wrong. Deals are always risky, but doing nothing in a downtown may be the riskiest move of all.
Acquisitions and divestitures are key tools in the implementation of corporate strategy. Since corporate strategy needs to be implemented throughout the business cycle, in good economic times and bad, so must M&A. In fact, many of the most value-creating deals are done during economic downturns.