The type of merger and acquisition (M&A) strategy you choose can make or break an M&A transaction. When planned well, M&A strategies can be the critical tool that drives growth, competitive advantage, or diversification. Conversely, following the wrong strategy can lead to wasted resources, missed opportunities, and millions of dollars lost.
Given the risks of failure listed above, understanding the strategies available from the outset is vital. We’ve broken down three different M&A strategies in our guide below – horizontal, vertical and product/market transaction – to help you identify the best fit for your situation and your organization.
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Key Takeaways
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Table of Contents
- What Criteria Differentiate M&A Strategies?
- 3 M&A Strategies to Consider for Your Company’s Growth Goals
- Pros & Cons of Each Strategy
- How to Choose an M&A Strategy
What Criteria Differentiate M&A Strategies?
We have pinpointed the criteria and factors that differentiate and affect the three main M&A strategies.
They are:
- Industry: Depending on the industry, a horizontal (competitor-focused) deal may be more suitable, or your sector may make a vertical (supply chain-focused) acquisition more appropriate.
- Supply Chain: It’s common for companies to want to control production lines and deliveries by acquiring suppliers or distributors. This reduces costs and subsequently increases efficiency.
- Geography: If you want to start trading in another region, expanding into new geographies means you can do so through an established local operator.
- Transaction Buyer Type: Whether you want to gain long-term synergies or make profits from reselling a business determines if you are a strategic or a financial buyer. Financial buyers include entities looking to take businesses public.
- Company Size: If you run a larger firm, you may want a more complex, multi-layered strategy, while smaller businesses may have a simpler, quicker aim in mind for their M&A deals.
- Growth Objectives: Looking at your growth objectives can help you pick a strategy. Opting for product/market transactions can be beneficial if you want to diversify risk. However, a horizontal deal can be more advantageous if you want to dominate your current industry.
- Regulatory Environment: Finally, an appropriate M&A deal can help you adhere to regulations more easily. For instance, if you expand into a new region, you can do so through merging or acquiring with another business that already operates there and has robust processes in place to ensure compliance.
3 M&A Strategies to Consider for Your Company’s Growth Goals
There are three main M&A strategies that you can follow to achieve your business objective. They are:
- Horizontal
- Vertical
- Product/market
Let’s look at each type along with their benefits and disadvantages.
Horizontal transaction
A horizontal transaction is where one company buys another company which operates in the same industry or market. Businesses often want to complete an M&A deal like this to increase market share by eliminating competition and help achieve economies of scale.
Completing horizontal acquisitions strengthens companies' positions by absorbing direct competitors. This results in an immediate larger customer base and may help companies strengthen their pricing power. As these deals can hypothetically result in the creation of a monopoly, they are subject to intense regulatory scrutiny.
A good example would be Facebook’s acquisition of Instagram in 2012. Through the acquisition, Instagram (then a rising competitive threat to Mark Zuckerberg’s firm) was stopped from increasing its market share at the expense of Facebook. Plus, when the deal was complete, Facebook not only had fewer competitors, but it also improved its revenues.
Vertical transaction
A vertical M&A deal occurs when a company buys another business operating at a different stage of the same supply chain. For example, a manufacturing company may acquire a parts supplier to streamline production. Similarly, a retailer may purchase a logistics company so that it can manage deliveries in-house and minimize operational costs.
Vertical acquisitions yield numerous benefits. They optimize resource utilization, improve supply chain coordination, and strengthen product quality control. As a result of enhanced operational efficiency, companies can reduce delays and ensure better product availability.
Note, however, that vertical M&A deals are complex because they often integrate businesses with different operating models.
Amazon’s acquisition of Whole Foods is a good example of a vertical M&A deal. This acquisition empowered Amazon to expand into the physical grocery market while using its proven supply chain and distribution process.
Product/market transaction
In a product/market transaction, a company acquires a business to expand into new product lines or geographic areas. This strategy best suits companies that want to diversify their product offering or tap into a new geographic sector.
Product/market transactions reduce the risk of relying on a single product or market. Importantly, they allow companies to expand their portfolio more quickly than if they were to start from the ground up. This is because the acquired company comes wielding an established operational system, customer base, and brand equity.
Still, these acquisitions can be complicated. The integration process is often convoluted due to complex operations alignment and the adjustment to a new sector.
A noteworthy example of a product/market transaction is Google’s purchase of Fitbit. This acquisition allowed Google to grow its product offering in a market where it previously had little experience. By expanding into the wearable tech sector, Google diversified its product portfolio and became more competitive with Apple and other tech giants.
Pros & Cons of Each Strategy
As briefly alluded to, each strategy has its benefits, but also its drawbacks. As a result, one type may be more advantageous for your business than another, depending on your business objectives.
We’ve summarized the key considerations for each strategy in this table:
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Strategy Type |
Definition |
Pros |
Cons |
Best Use Case |
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Horizontal Transaction |
Acquiring a competitor in the same industry or market |
- Increases market share - Reduces competition |
- Regulatory challenges - Potential culture clashes |
Seeking market dominance |
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Vertical Transaction |
Acquiring a company in a different part of the supply chain |
- Enhances operational efficiency - Reduces costs |
- Integration challenges |
For streamlining supply chain operations |
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Product/Market Transaction |
Expanding into new products or markets |
- Diversifies revenue streams - Reduces risk |
- Market misalignment - Brand dilution risks |
When seeking growth through diversification |
How to Choose an M&A Strategy
To ensure long-term success, choose the right M&A strategy based on balancing its pros and cons. Do so by considering the following factors in your decision-making process:
- Industry
- Company size
- Culture fit
- Geography
- Getting support from an M&A consulting firm
Let’s explore these vital considerations in more detail:
Industry
The industry in which your business operates heavily influences the right strategy to pursue. If you are in a highly competitive industry, a horizontal transaction can eliminate rivals, resulting in better market share for you. However, if you operate in a complex supply chain, you could explore vertical transaction opportunities instead to gain cost-saving efficiencies.
Company size
If you already have a large company, you may want to consider pursuing several M&A opportunities at once—though always do so with your overall target in mind. If you run a smaller firm, you may find a vertical transaction merger a more straightforward solution to pursue.
Culture fit
It’s so easily overlooked, but ensuring cultural alignment between you and your potential company acquisition is particularly important when exploring the idea of a horizontal transaction and trying to acquire or merge with a direct competitor. Post-deal operations will be far easier when you have a good cultural fit.
Geography
Geography also plays an important role when determining an M&A strategy. If you’re looking at product/market transactions, you’ll need to look into this in detail. For instance, when you expand into a new region, it’s vital to examine the local market conditions, including regulation and consumer behavior. Doing so will ensure your acquisition will align with your growth goals.
Get support from an M&A consulting firm
All of the above can be an intimidating, overwhelming prospect. Yet, M&As are a key way for your business to expand, so ignoring any M&A opportunities means you miss out on strategic growth opportunities.
Partnering with an experienced consulting firm simplifies the process for you. 8020 Consulting offers expert guidance, tailored to your company’s specific needs. We have a proven track record when designing and executing successful M&A strategies. Our support helps you mitigate risk while optimizing your outcomes.
8020 Consulting is Your Expert Partner in M&A Strategy Design & Execution
The right M&A deals can expand and grow your business efficiently and effectively. Selecting the right M&A strategy is, therefore, central to achieving your business objectives. At 8020 Consulting, we have vast experience in the M&A space. We help businesses looking to expand, resulting in less stress and more success for the businesses involved.
Through our tailored solutions, we can help you pick the right approach and implement the right steps for your business so your company can thrive. From strategy design to execution, 8020 Consulting ensures your M&A activities are aligned with your goals.
Contact us today to learn more about how we can help your business achieve a successful M&A outcome.
