M&A Taxonomy

“Consolidations” are acquisitions that occur mostly in mature industries with little growth and low margins. Companies buy competitors for their customers and associated revenues, spread their fixed costs over the larger population, and thereby reduce their unit costs. For example, a century ago there were hundreds of automobile producers in the United States, and now only a handful. These types of acquisitions are lower risk and should pay off relatively quickly at favorable purchase prices.

“Bolt-ons” or “tuck-ins” are when a larger company acquires a smaller company to round-out its product line or serve some specific purpose. For example, big technology companies frequently acquire start-ups with new ideas and products, and then incorporate them into their product lines. Again, these types of transactions are relatively low-risk and can have quick payoffs.

“Platform transactions” are acquisitions of companies in adjacent markets. These often occur when technologies or industries are converging, and a company extends its existing platform to an adjacent space. For example, Amazon has extended its platform into many domains through acquisitions: it started in books, and now delivers groceries. These types of transactions may be higher risk because they extend the acquirer into new and uncertain territory. Consequently, while these can lead to high returns, it may take much longer to realize the financial benefits.

“Transformative transactions” are acquisitions where the acquirer attempts to move away from a mature declining business and towards a new and growing market. GE, Kodak, Westinghouse, and many older U.S. industrial companies have tried to use transformative transactions, with varying degrees of success, in such areas as medical technology and entertainment. These are the highest risk types of transactions because the acquirer is gambling that it can succeed in a business in which it has no prior experience.

Finally, we should recognize that “M&A” implicitly includes divestitures. While the process may be different, the financial modeling is the same. Both sides of a transaction are best served by understanding the value of assets being exchanged.