There are several different types of acquisition – from horizontal to vertical – and all of them can be relevant to your investment goals as a business owner.
Perhaps you’re looking to take over a competitor to gain market share or trying to diversity your portfolio to insulate you from market swings
Let’s take a look at the four most common types of acquisition in business.
What is Acquisition in Business?
Simply put, acquisition means buying another company to help a company grow by seeking to fulfil any number of goals, ranging from:
- Improving economies of scale
- Lowering labor cost
- Increasing market share
- Eliminating competition
- Acquiring new staff, expertise or technology
Sometimes this means acquiring a company in the same industry or higher or lower in the supply chain.
In an acquisition, one company takes over all the assets of another. The acquired company becomes a part of the acquirer and loses its identity.
This is different from a merger where two companies combine to create a new entity.
Types of Acquisition
- Vertical Acquisition
A vertical acquisition is one of the most common types of acquisitions. This is when a company buys another that is either higher or lower in the supply chain.
A clothing company might buy a textile factory, for example.
This can be advantageous for many reasons.
It’s a lot harder to start a business than buy an already existing profitable one. There is no need to search out a location, staff, suppliers, etc., to start a textile factory.
It can also save money in the long run and help insulate the clothing company from market trends.
Let’s say it costs $1 to make a shirt and the factory sells those shirts to the clothing company for $2.
If the clothing company owns the textile factory, they can get shirts for $1 – a significant cost savings. They can also sell shirts to other clothing companies for $2 and make profit that way.
- Horizontal Acquisition
A horizontal acquisition occurs when a company buys another one in the same business, industry or sector. A plumbing business buys another plumbing business in the same geographic area.
This usually means buying a competitor in the hopes of gaining market share. If there is another business that is competing with yours it’s often easier to just buy them out. If you can’t outsell them, simply acquire them.
However, doing this can sometimes lead to a monopoly where one business has a dominant market share over one particular industry.
This can sometimes violate antitrust laws governed by the Federal Trade Commission but is unlikely to be a concern in the SMB realm.
- Conglomerate Acquisition
A conglomerate acquisition is when a business buys a completely different company – perhaps in another industry or geographic area. Perhaps the new company has a different business model, product line or customer base.
This is usually done to diversify in the hopes of lowering the risk profile for the new conglomerate company.
Perhaps a clothing company decides to buy an ice cream business, for example.
The new conglomerate entity will be less susceptible to market fluctuations if it was only a clothing company. If people stop buying shirts, they’re unlikely to stop buying ice cream.
This can give stability to SMBs because they are less affected by market trends if they only operate in one industry.
The parent company can also provide resources and expertise to new acquisitions to help them become more profitable.
- Congeneric Acquisition
A congeneric acquisition occurs when a company buys another in the same industry buy in a different market. It is similar to a horizontal acquisition but usually happens in different geographic locations.
Let’s say a clothing company in America buys another in Canada. They are not competitors per se. They will essentially carry on with the status quo after the acquisition.
This is often done in the hopes of avoiding a potential threat from the other brand down the road. The American brand can insulate itself from the Canadian one by purchasing it before it attempts to move into the U.S.
This can also help companies enter new markets without having to compete with existing brands.
Advantages of Business Acquisition
There are several advantages to the various types of acquisitions.
One is that it improves economies of scale. A larger business can purchase raw materials in bulk, hopefully lowering costs and increasing profit margins.
It can also help lower labor costs by eliminating any redundant positions in the new entity.
An acquisition can provide more financial resources after the two companies have combined. This could result in more investment opportunities in the future for more acquisitions. It can also help reach a wider base.
Horizontal and congeneric acquisitions can dramatically increase market share and quickly eliminate competition.
Acquisitions can also let a business quickly acquire new experienced staff, technology to improve production and distribution channels.
Buying another company – whether that’s to eliminate competitor or just to diversify your assets – is a wise investment strategy to consider in your financial planning as a business owner.
It can also help you to secure your supply chain by buying another company either above or below your current one.
There are many advantages to business acquisition but there can also be some costs too.
It can result in lost opportunities because you’ll have to spend a lot of time, money and energy on the acquisition. As in all things, they are never guaranteed until you’ve officially closed the deal.
It can also be a fairly expensive process because you’ll want to make sure you work with professionals, from lawyers to business valuators or brokers. This is often money well spent to ensure you get a good deal.
Hopefully you’ve got a good grasp of the four types of business acquisition and are ready to see how they could fit into your financial goals.