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Finally, an acquisition can be effected by the purchase of the target‟s assets. Asset acquisitions are
sometimes done to escape the liabilities (real or contingent) of the target firm or to avoid having to
negotiate with minority shareholders. The downside is that the legal process of transferring assets may
be expensive.
Acquisitions can be categorized based on the level of economic activity involved according to the
following:
• Horizontal: The target and bidder in a horizontal merger are involved in the same type of
business activity and industry. These mergers typically result in market consolidation (i.e., more
market share for the combined firm). Because of this, the proposed merger is subject to extra
antitrust scrutiny. The 2008 merger of Sirius and XM—the two main satellite radio providers—is
an example of a horizontal merger (see Exhibit 17.1). Because the combined entity would have a
near-monopoly market share in the United States, the Justice Department demanded caps on price
increases before approving the deal.
• Vertical: A vertical merger involves firms that are at different levels of the supply chain in
the same industry. For example, the 1984 merger between Texaco and Getty was prompted by
the former‟s desire to secure Getty‟s drilling operations and oil fields to complement Texaco‟s
strengths in refining, distribution, and marketing.
• Conglomerate: In a conglomerate merger, the target and bidder firms are not related.
These were popular in the 1960s and 1970s, but are rare today. An auto manufacturer acquiring
an ice cream producer would be an example.
In the typical going private transaction, all of a public company‟s outstanding shares are purchased
on the open market and the company becomes a private entity. Many of these deals are initiated by
private equity (PE) firms, often in conjunction with a management team, and they typically involve
high levels of debt. 1 PE buyers usually have a four- to seven-year time horizon and look to exit their
investments either by finding a strategic purchaser or returning the business to public ownership.
Armed with a basic understanding of the types of acquisitions and how they occur, we now turn our
attention to the track record of M&A transactions. Be forewarned that it is spotty at best and that many
practitioners, analysts, and academics believe that the odds are stacked against acquirers. We do not
say this to dissuade anyone from pursuing an acquisition strategy, but rather to highlight the fact that
without careful planning, there is little chance of success.