Types of mergers and acquisitions: the 6 main types explained, and merger vs acquisition

Why do companies merge, and what are the main types of mergers and acquisitions? There are six types that come up most often, each defined by what the buyer is trying to achieve: horizontal, vertical, conglomerate, market extension, product extension and reverse merger. Below is what each one means and the goal behind it, followed by the real answer to the question of what separates a merger from an acquisition.

What is a horizontal acquisition?

A horizontal acquisition is when one company buys a similar company, typically a competitor. The goal is to minimise competition and expand market share. If two firms sell the same thing to the same customers, combining them removes a rival and gives the buyer a larger slice of the market in one move.

What is a vertical acquisition?

A vertical acquisition is when a company buys another company in the same supply chain, but either higher up or lower down. A producer buying a distributor of its products is the classic example. The goal is to minimise costs and to secure the supply chain, so that the business is no longer dependent on a third party for a critical link between production and customer.

What is a conglomerate acquisition?

A conglomerate acquisition is when a company, typically a holding company that already owns quite a few businesses, decides to buy an entirely different company. The target serves different customers in a different industry. The goal is to diversify the portfolio, so that the group is not exposed to a single market or a single kind of risk. There is usually no operational overlap between the buyer's existing businesses and the target; the logic is spreading risk, not combining operations.

Market extension acquisition

A market extension acquisition is when one company buys another company that sells similar products, but to different markets. The buyer's products and the target's products overlap; the customers do not. The goal is to increase the market for the same or similar products the company is already selling, for example by acquiring a business that serves a different region or a different type of customer.

Product extension acquisition

A product extension acquisition is the mirror image. One company buys another company that sells different products, but to the same market and the same kinds of clients. The goal is to increase customer lifetime value. In other words, you are selling more things, for more money, to the same people. The existing customer relationship does the work, and the acquisition supplies the additional products to sell into it. Businesses that already have a loyal client base often find this the quickest route to growth.

What is a reverse merger?

A reverse merger is when a private limited company buys a publicly traded company. The goal is to avoid the private company having to go through the lengthy and costly process of moving from private to public. Instead, it simply buys a company that is already public and, in that way, turns the private company into a public one without a traditional listing process.

Merger versus acquisition: what is the difference?

In theory, there is not really such a thing as a merger. Someone is always buying someone else.

• A traditional acquisition is straightforward: an individual or a company buys the assets or the shares of another company.
• What gets called a merger is, for example, where the two companies that want to combine set up a third entity, and that third entity buys the assets of both of them. It is still an acquisition, because the third entity is acquiring the two businesses beneath it. The label "merger" describes the commercial intention of two businesses coming together as equals; the legal mechanics are still a purchase.

That matters in practice, because whichever type of deal you are doing, the legal work follows the same pattern as any other acquisition: someone is the buyer, someone is the seller, and the documents need to reflect which is which.

Which type are you doing?

Knowing which of the six types you are pursuing is useful beyond labels. It tells you what the deal has to deliver. A horizontal acquisition lives or dies on retaining the target's customers. A vertical acquisition depends on the supply arrangements actually transferring. A product extension depends on the target's products fitting your existing customer base. Being clear about the goal from the start makes it easier to decide what to investigate in due diligence and what protections you need in the purchase agreement.

Next steps

Once you know why you are buying, the next decision is how: whether to structure the deal as a share purchase or an asset purchase, which affects what you own, which liabilities you inherit and how the deal is taxed. That is covered in Share purchase vs asset purchase. Speak to a corporate solicitor before you agree the structure, so the legal route matches the commercial goal.