Strategic Classification

Most acquisitions may be classified according to their strategic significance to the acquirer. The projected price in each type of acquisition depends on the specific characteristics of the acquirer and of the target, and on a correct analysis of the competition in the target's market (see Chapter 9 for a discussion of the impacts of mergers or acquisitions on valuation).

Horizontal Acquisitions

In horizontal acquisitions, the target operates in the same field as the acquirer, such as a merger between telephone companies which operate in the same field but in different countries. A horizontal acquisition is supposed to yield benefits such as an increase in the acquirer's market share, savings on operating costs (economies of scale), and synergy. In many cases, large companies acquire small companies which operate in a certain niche in the general field of the large companies' activity, in order to complement their line of products. Many startups now direct their plans so as to complement the product lines of such companies.

Vertical Acquisitions

In vertical acquisitions, the target operates at a different layer of the production process from the acquirer. For instance, a newspaper which is focused on media creation may acquire a company which deals with newspaper distribution.

Acquisitions of this type have been common in recent years in many fields, since many giant companies have been increasingly focusing on main fields of activity in which they aspire to become players with a relative advantage. Whereas horizontal acquisitions assist in completing a line of products in a particular field, vertical acquisitions allow such companies to create a value chain which enables their customers to receive products and services without resorting to other companies.

Conglomerate Acquisitions

In conglomerate acquisitions, the target operates in a different field from the acquirer. This type of merger may be divided into several sub-categories. One sub-category is mergers associated with the expansion of a line of products. Although the companies do not operate in the same field, they may use some parts of their infrastructure to reduce costs and enjoy higher profit margins. These mergers are beneficial also when the company has a reputation which is transferable to other fields. The Virgin group, for instance, operates in different fields (such as aviation, beverages, trains, radio), which are often united by the ability to enjoy the group's somewhat mischievous image.

Many publicly traded investment companies invest in other companies in a way which often gives the impression of a conglomerate acquisition, although they later turn out to be planned acquisitions designed to create complete packages of products and services. The boundaries between operating investment companies which create conglomerates and financial investment companies have also become vague. Investment companies, particularly those with many publicly traded subsidiaries (such as CMGI), are often trying to avoid being legally classified as mutual funds, which are subject to various investment, reporting, and supervisory rules.

Other conglomerate acquisitions are made in order to minimize the risk of bankruptcy of one of the companies by balancing out the losses of one portfolio company with the profits of another whose profitability components and sensitivity to economic parameters are different.

Numerous investment theories discuss their economic rationale for conglomerates, but in general, they have not been well-received by the financial community in the last few decades.