What is a company merger and what types are there?

In addition to natural growth and raising funding, startups and scaleups see mergers as a way of gaining traction. These business strategies, in which companies start operating together, serve to enhance business development and facilitate business expansion, and can be very useful when it comes to improving a brand’s position in the market.

In the first three quarters of 2023, total global M&A deal volume reached $1.95 trillion, according to Bloomberg. But what exactly are mergers, and what advantages do they offer over other growth strategies?

What is a corporate merger?

A merger is a process whereby two or more companies join together to operate jointly and, in some cases, create a new business entity. It usually involves the disappearance of at least one of the two original companies, although it is also possible for both organisations to disappear to make way for a new one.

In the case of high-growth companies, especially scaleups, merger strategies can be useful to support expansion and consolidation objectives, especially for companies seeking to enter new markets or acquire complementary technologies. On the other hand, it is also common for more established companies to acquire startups in order to stay at the forefront of innovation. These acquisitions allow them to quickly incorporate new technologies and emerging trends, according to Inverbac.

In the case of unicorns, startups valued at more than $1 billion before going public, they may consider merger strategies to consolidate their market position, diversify or acquire key technology or talent. They also merge to exploit synergies and complementary strengths to access new customer segments, according to OBS Business School. A well-known example is the merger between electric vehicle charger manufacturer Wallbox and the SPAC Kensington Capital in order to list on the New York Stock Exchange. SPAC stands for Special Purpose Acquisition Company.

Main types of mergers

Depending on the relationship between the parties, the nature of the combination and the resulting structure, different types of mergers can be identified. According to their legal nature:

• Takeover merger. One company acquires another, and the acquired company ceases to exist as an independent entity. All the assets and liabilities of the acquired company become part of the acquiring company. It is important not to confuse this type of merger with an acquisition process, where the acquired company continues to exist, albeit under new ownership and control. In a takeover merger, the acquired company ceases to exist as a separate entity, and its assets and liabilities are fully incorporated into the acquiring company, forming a new single entity.
• Pure merger. Two merging companies disappear to form a new company, in which the assets of both companies are integrated.
• Merger by partial contribution of assets. One company absorbs part of the assets of another and integrates them into its structure or creates a new company. Both companies continue to exist.
• Conglomerate merger. This occurs when companies that have no direct business relationship or similarity in their main activities merge. The aim may be to diversify risk and enter new areas of business.
• Reverse merger. This occurs when a smaller company acquires a larger one. It is less common than the above, but is used to gain access to new markets, technologies or financial resources.

If they are classified according to productive aspects, they can be divided into two main types:

• Vertical merger. Two companies from different production sectors merge their assets in order to improve their efficiency and productivity under a single entity.
• Horizontal merger. Two companies in the same sector or industry and at the same stage of the production process merge in order to increase efficiency, reduce costs and gain market share.

How to carry out a startup or scaleup merger process

A merger requires careful planning and execution, especially in high-growth companies with unique dynamics. A PwC study provides some basic guidelines to consider:

1. Strategic assessment. Clearly define the strategic objectives of the merger – will it help to scale faster, access new markets, acquire key technology or talent, or improve operational efficiency?
2. Identifying potential partners. Identify potential target companies that align with strategic objectives. This could involve assessing companies with complementary technologies, promising customer bases or key capabilities. It is also important to have advisors or lawyers who understand the economics of innovation and the legal issues involved in the process.
3. Due diligence. This is a comprehensive process to assess the target company’s finances, corporate culture, assets and liabilities, intellectual property and other key aspects. Integration capabilities and future development prospects must be analysed, and attention must be paid to the ability of products and customers to integrate technologies and services.
4. Negotiation and agreement. Before a decision is made, an assessment of the priority components of the business, such as intellectual property, customers, products, assets, brand, talent or corporate culture, must be carried out. The terms of the merger are then defined, including the transaction structure, valuation and shareholding.
5. Integration. Key talent from both companies must be identified and retained, and cultural differences understood to ensure a smooth transition. Internal and external communications will be another key element of a successful merger, in order to maintain transparency and trust from employees, customers and investors. In addition, an ex-post evaluation will also be necessary, especially in a rapidly changing start-up market.

One of the most notable mergers in 2023 was that of Spanish fintech Unnax, which joined forces with France’s Powens in April to create a single group and expand its reach in the strategic Latin American market. The year also saw the merger of Chile’s Rankmi, an integrated human resources management company in Latin America, which joined forces with Mexico’s Osmos, a payroll technology company, in March. In addition, the fintech Technisys merged with Galileo Financial Technologies to create a single hybrid financial services platform. These processes are not only shaping the structure of the market, but they are also driving innovation. Strategy will be critical for operations to be the gateway to new businesses, technologies and customers.