Every start-up aspires to become a big venture. This is only possible when a company purchases another company’s share and gains control of that company. In other words, this is called a business acquisition. While acquiring a business is a complex process, there is no shortcut to making acquisitions successful. In this article, our emphasis is on the six types of successful acquisitions that will help you understand the next move you need to make to scale up your start-up.
Understanding Acquisitions
There comes a certain point in your business where the next step is acquiring another company. There could be a number of reasons the board of directors make that decision. It may be the next logical step towards growth, to bring new technology, to expand into the foreign market or to decrease competition. Irrespective, let’s break it down to help you benefit from it.
- Vertical Acquisition: The sole reason for a vertical acquisition or merger is to increase business. An acquisition of this kind happens either upstream, such as a vendor or supplier, or downstream such as a retailer or processor. The purpose is to increase synergies which often result in reduced costs and increased productivity and efficiency.
To help you understand better, let’s take a simple example where an electronics retailer merges with an electronics manufacturer. This way, the retailer gains direct access to the product range without any disruptions. Now, the retailer becomes the sole supplier, deflecting the possible competition. - Horizontal Takeover: A horizontal takeover entails a business growth strategy wherein one company grows its operations at the same position in the industry. In this case, the parent company will choose to buy another firm or competitor from the same industry, which is at the same level in the supply chain. A horizontal acquisition is essentially a merger and acquisition like a marriage, involving two companies that are usually competitors at the same stage of the production process. The benefit of a horizontal takeover is that it permits a business to expand and eliminate competition directly from the market. This leads to prolific growth for both companies in terms of market share and control.
- Conglomerate Merger: A conglomerate merger involves a merger where two different businesses from different industries come together. They are essentially involved in two varied enterprises. In this case, a parent company buys another company in a different sector that is unrelated to their business. Unlike the other kinds of acquisitions, this one does not bring a prompt ramification, initially as it takes a certain period of time to absorb the services or products.
- Concentric or Congeneric: A concentric or congeneric merger occurs when the businesses are of the same industry, but they do not directly compete with each other. This kind of acquisition or merger happens when the parent company purchases another company that may be in the same or a closely-related sector with different products.
An easy example to help you understand this type would be that of a camera retailer that would acquire another retailer that deals with camera bags. This kind of acquisition helps both companies to upsell their own products that complement their purchase without the customer having to go elsewhere to find what they need.
The simple benefit of this kind of merger is that it provides a common platform to the potential customer by showcasing a wide range of products that complement their existing array. - Stock Mergers: A stock merger involves the sale of the majority of assets. Instead of the business which is acquired being entirely absorbed by the parent company, it chooses to become a subsidiary of the buyer. It is a perfect type of acquisition as the benefit is avoiding an unforeseen crash because of the mismanagement of a sudden merger with another company while ensuring profits are maintained.
- Complete Acquisition: In a complete takeover, one business or company buys out the majority of assets from the other business. The sale of its majority assets makes it a unique acquisition method that cannot be called a merger. This places a high position of power into the hands of the buyer as it shifts complete control to the buyer.
Conclusion
As the decision-making head of your start-up, you will need to define the purpose of the acquisition. It will enable you to choose the type of acquisition that best suits your company. Acquiring different businesses can serve the correct purpose depending on what you define as the next step of your entrepreneurship.