Classification of mergers based on role in the value chain:
A business value chain consists of raw material suppliers, Tier 1, Tier 2, tier 3 vendors, suppliers of utilities, suppliers of technology, suppliers of machine tools, users of byproducts, various players in the distribution channel such as wholesalers, retails, warehouses, logistics companies, retail chains, etc. Value chain also consists of replacement products, substitution product, competing products, niche products and their value chains. Depending upon the role of the two companies involved in merger and acquisition in the supply chain or value chain, mergers and acquisitions are classified in the following manner:
Vertical mergers:
Vertical merger means either acquisition of the direct suppliers or the acquisition of the other key players in the distribution channel. Following are the two types of vertical mergers:
Forward integration:
Forward integration means acquisition of a company belonging to the distribution channel the product of a company. Using forward integration, the company participates in the next stage of value addition to the final product. It is a general observation that as we move forward in the value chain the profitability increases. Ownership of the distribution channel also reduces the risk by competition and substitution. Example: Company in manufacturing of paper acquires a company in two newspapers, magazines, publications, notebooks, etc.
Backward integration:
Backward merger means acquiring the key suppliers of a company. This saves the company from the supply chain shocks of availability of raw material, prices, etc. Example: If a famous retail brand of clothes acquires a textile mill, it is called backward integration.
Horizontal merger:
Horizontal merger means that the merging companies are in the production of the same products with different name or brand. Example: Acquisition of a cold rolled steel company by another company producing cold rolled steel.
Lateral merger:
Lateral merger means a merger with a accompany in a different but similar product including at a different stage of production. But the companies being in overall the same sector or industry. Example: A company in in school education acquire another company in professional corporate training.
Co-generic mergers:
It is a merger between two or more entities which are related to each through the same set of customers, experts or technology, suppliers, skills, business environment, etc. Example: Merger of a allopathic medicine company with Ayurvedic medicine company.
Concentric mergers:
It is special variety of cogeneric mergers in which two businesses have the same customers, but merging companies offer different products and services to these clients. For example: Merger of a steel company and cement company both of which supply to the real estate and infrastructure sector.
Forward merger:
Forward Merger, the company gets acquired by its client company. The concept is not any different than forward integration except with the difference of the perspective which legal entity remains.
Reverse Merger:
In a reverse merger, a company gets acquired by its supplier. The concept is not any different than a backward integration except with the difference of the perspective and which entity remains.
Conglomerate mergers:
It is a merger between entities operating in an entirely different products, sectors, industries and maybe even markets. It is a merger between entities totally unrelated to each other in terms of what they do and how they generate revenue. Conglomerate merger results in creation of a diversified businesses.
Triangular Merger:
In a triangular merger, the acquirer creates a wholly-owned subsidiary, which in turn merges with the selling entity. The selling entity then liquidates. The acquirer is the sole remaining shareholder of the subsidiary.
Apohan very well understands the role of a SME company in the value chain. Apohan helps its clients in understanding the impact on the value chain of the business. Apohan carries out professional, end-to-end, customized consultancy services through value chain analysis of M&A deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.
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