Mergers and acquisitions come in many forms. Depending on the goals of the move, companies can opt for a broad range of M&A structures.
Of the £7.4 billion in UK M&A activity in Q2 2023, most were horizontal or vertical; horizontal involves two competitors coming together, and vertical involves a buyer and a seller. These two M&A types however, can be mergers or acquisitions. In contrast, conglomerate and concentric M&A deals are always mergers.
Here’s what you need to know about these mergers in plain English.
What is a conglomerate merger?
Conglomerates are large companies consisting of smaller companies acquired over a period of time – a conglomerate merger involves two firms from unrelated industries.
Although the popularity of the conglomerate has waned in the modern era, some of the most prominent names in the business world are technically part of wider conglomerates today.
For example, take Berkshire Hathaway, founded by Warren Buffet. Some of the company’s holdings include auto insurer GEICO, carpet manufacturer Shaw Industries, and clothing company Fruit of the Loom.
Why would you choose a conglomerate merger?
Conglomerate mergers are among the rarest types of mergers today, but they still have their place. Some of the advantages of these mergers include:
· Diversification – Conglomerate mergers enable companies to diversify their business interests. If a company is in a vulnerable market, conglomerate mergers can help balance the scales.
· Synergies – Combined entities are positioned to perform better than individual entities. Even within conglomerates, smaller companies can benefit from connections up and down the supply chain to increase sales and reduce costs.
· Cash Utilisation – Companies with excess cash that cannot expand further in their own industries may want to unlock new opportunities by moving cash into another company in a different sector.
· Cross–Selling – Conglomerates can improve their customer bases by cross-selling their products and services to another company’s customers.
· Economies of Scale – Conglomerates can be used to achieve economies of scale, such as through research and development and marketing.
Example of a conglomerate merger
Conglomerate mergers continue to happen today, even if they’re not as common as in the 1960s and 1970s.
Often cited in business courses as a prime example of a successful conglomerate merger, the American Broadcasting Company (ABC) and Disney merger saw the latter enter the national television realm.
The 1995 merger opened Disney to national television and ESPN’s sports coverage. Since Disney already possessed several cable networks, this merger formed a mixed conglomerate that allowed Disney to expand its distribution options and increase its content library.
Another example of a conglomerate merger was the coming together of eBay’s online auction platform and payment processor PayPal. Although the 2002 merger ended in 2015 due to shareholder pressure and changing business environments, the firms separated amicably after a long and successful merger.
What is a concentric merger?
Concentric mergers are similar to conglomerate mergers, with one key difference – concentric mergers bring two companies from the same industry together.
These companies typically use similar technology, marketing techniques and distribution channels during their day-to-day operations, making integration a much simpler affair than other types of M&As.
This doesn’t necessarily mean they sell competing products or services, or even similar ones. All it means is that they operate somewhere in the same industry.
This may also be known as a congeneric merger in some parts of the world.
Why would you choose a concentric merger?
Concentric mergers are more common than conglomerates. However, they continue to pale in comparison to the quantity of horizontal and vertical mergers.
Several reasons exist as to why two companies may agree to a concentric merger, including:
· Diversification – Even though two companies may operate in the same industry, it doesn’t mean they offer similar products. The combined entity can benefit from a more diverse product range by coming together.
· Market Share – Since these companies are drawn from the same industry, it enables a new entity to command a larger market share, which can support growth and the elimination of competitors.
· New Customers – Often, two companies may be marketing to the same demographic. Concentric mergers allow both companies to acquire new customers and increase the value of existing ones.
· Economies of Scale – The combined entity can share technology, production processes, talent and distribution channels to reduce costs and create economies of scale.
In many ways, the benefits of concentric mergers resemble those of conglomerate mergers. However, how they take advantage of these benefits will differ.
Example of a concentric merger
Concentric mergers have had a long history of success among multinational companies. For example, Coca-Cola announced a merger with Vitaminwater in 2007.
It was a smart move for the company best known for its soft drinks as consumer habits shifted toward healthier alternatives. Unsurprisingly, the 2007 merger resulted in the entity achieving a greater stranglehold on the industry, which remains even today.
In recent history, the concentric merger of Heinz and Kraft was the largest merger of this type in history. The merger brought together Kraft, a leading producer of products like natural and processed cheese, and Heinz, the world leader in sauces and frozen appetisers.The 2015 merger was valued at roughly $100 billion, and the new company, Kraft-Heinz, now has its products present in the majority of the world. Today, it’s one of the largest food companies on earth.
How do concentric and conglomerate mergers differ?
Concentric and conglomerate mergers share many of the same benefits. However, key differences must be considered by business leaders seeking to advance their goals.
Neither merger type is better or worse than the other. It depends on how you deploy them within the context of your long-term plans.
So, what are the key differences?
Intra vs. inter-industry moves
The primary difference is whether you’re moving inside or outside your industry.
A conglomerate merger means merging with a company from a different industry. Concentric mergers occur within the same industry, thus opening opportunities for collaboration.
Business owners opting for a concentric merger do not need to reinvent the wheel. Since many of the processes and distribution channels will be identical, you can use your expertise to make the merger successful.
Contrast this to conglomerate mergers, where extra expertise may be needed to ensure the two unrelated companies remain primed for success.
Finally, opportunities for collaboration depend on which type of collaboration you’ve opted for.
Conglomerations may have some opportunities for collaboration. For example, a steelmaker could provide deals for a railway company or an automaker within the conglomeration. Likewise, a home insurance company could collaborate with a construction company.
On the other hand, concentric mergers offer ample opportunity for collaboration because they operate in the same industry. Furthermore, cross-selling becomes simple because each company targets the same customers.
How do I know which merger is right for my business?
Determining which merger is correct for your business depends entirely on what you want to achieve. Only you can decide which path you wish to take. Ideally, this should begin with a SWOT analysis, discussing:
Strengths – Where does your business excel?
Weaknesses – What are the flaws in your current business?
Opportunities – Are there any opportunities you could take advantage of?
Threats – What are the most significant risks to your business?
For example, if, after a SWOT analysis, you find that macroeconomic changes are altering consumer behaviours and could threaten your profitability, you may decide it’s time for a conglomerate merger to spread your risk.
Like any merger or acquisition, you’ll still need to conduct the same in-depth research and due diligence process to pinpoint suitable candidates. Additionally, you’ll need to determine how to make the integration process successful.At Hilton Smythe, we specialise in supporting UK companies embarking on any merger or acquisition. If you need support in making your conglomerate or concentric merger happen, speak to our team of experts today.