Most people intuitively understand the concepts of mergers and acquisitions. In a merger, two or more companies combine to form one larger, all-encompassing company. In an acquisition, one company buys out another and effectively integrates it into the organization.

Still, mergers and acquisitions come in many different varieties – and it pays to know how each of these approaches works as a business owner.

Types of Mergers and Acquisitions

These are some of the most common types of mergers and acquisitions that companies undergo:

1. The vertical merger. Vertical mergers are some of the most common mergers and acquisitions, and they’re relatively simple to understand. In this type of merger, two or more companies share much in common; they may have very similar products and services, a similar target audience, and even similar operating models. However, each company brings something different in terms of supply chain function, so that together, the companies can operate synergistically. With combined resources and combined areas of competency, the resulting company can become a bigger organization that benefits from more efficient supply chain operations and a greater number of assets.

In most cases, vertical mergers arise from two or more competitors merging to become one. But vertically integrated companies don’t need to be competitors for this merger to work. For example, a manufacturer of complex machines can vertically merge with a parts manufacturer so that parts can be acquired and used more seamlessly. In this merger, the machine manufacturer benefits from a steady supply of cheaper parts, while the manufacturer of the part benefits from steady, predictable sales.

Vertical mergers are designed to combine companies in a way that makes a resulting company that’s superior to its constituent parts.

2. The horizontal merger. In horizontal mergers, two or more direct competitors combine. These companies have very similar business models and offer similar, if not identical goods and services. The goal here is not to create new synergy, but rather to expand operations dramatically and eliminate the threat of competition.

Horizontal mergers are most common in highly competitive industries where businesses operate very similarly to one another. For example, two fast-food burger chains offering very similar menus can combine into one, thus eliminating major competitors from the equation and instantly expanding the market share. In some cases, a horizontal merger can also result in lower operating costs.

3. The conglomerate merger. Conglomerate mergers occur between businesses with totally different business models or unrelated business activities. In some cases, companies can foster a mixed conglomerate merger, where companies that take part in the merger have at least some similar products or services in common. There can also be pure conglomerate mergers, where the organizations have almost nothing in common.

Oftentimes, conglomerate mergers are initiated when one company wants to diversify its revenue streams or begin operations in a totally new area.

4. The market extension merger. In a market extension merger, one company will acquire or merge with another specifically to expand its market reach. For example, let’s say your company targets young men, while one of your competitors targets young women. If your companies merge, the resulting combined company can target both young men and young women, ultimately reaching more people.

In this type of merger, companies usually have similar products and services, but totally different markets.

5. The product extension merger. In a product extension merger, two companies will typically share similar products in a similar market, but each company will offer something slightly different in their offered products. When the companies merge, they can pool their efforts to create an even better product that takes advantage of both company specialties.

There are several advantages to initiating a product extension merger. The product itself becomes better and more competitive. Customers become more satisfied and can sometimes get better service. And on top of that, the merging companies may be able to reduce costs and streamline efficiency.

Which Type Is Ideal?

Which type of merger or acquisition is right for your business?

That depends on several factors. You need to think about your existing competition, the state of your industry, your budget, and your long-term goals. For example, if your industry is rife with competition and most of your competitors offer very similar products to yours, a horizontal merger or a market extension merger could help you minimize competition while expanding your reach. If you’re more interested in improving your supply chain, a vertical merger might be better.

No matter what, mergers and acquisitions take a lot of work and due diligence. You’ll need to do your research, plan carefully, and hire the right experts to make sure you can execute this strategic move effectively.