The Ultimate Guide to Concentric Mergers
Concentric mergers are one of the more popular types of mergers and acquisitions.
More specifically, concentric mergers are a growth strategy via diversification aimed at establishing larger market shares and improved profits.
We, at DealRoom, are specialised in mergers and acquisitions of all kind and in this guide we go over the basics of concentric mergers as well as some famous examples, pros and cons.
What is a concentric merger?
A concentric merger is a merger in which two companies from the same industry come together to offer an extended range of products or services to customers. These companies often share similar technology, marketing, and distribution channels, and look to the concentric merger to create synergies. This type of transaction can also be called a congeneric merger.
How is it different from other merger types?
Concentric mergers differ from the other major types of mergers in that:
- A horizontal merger involves two companies (competitors essentially) in the same industry; the acquirer in this situation is working to gain a larger market share.
- A vertical merger involves the buy-side acquiring a company that is in the same industry, but in a different part of the production line. This gives the acquirer more power over the supply chain which can result in financial savings.
- A conglomerate merger is the merger between two unrelated companies; diversification is often the main goal behind this merger.
Reasons for a concentric merger
- Larger market share - as the acquirer diversifies, it subsequently gains a larger market share
- Diversification of products/services - in a similar vein, the acquirer gains access to the target’s lane in the industry via its products and services
- New customers - operating in the arena of diversification of products and larger market share often equates to new customers
- Financial gain - all three of the above should lead to improved profits and financial gain; moreover, new technology and shared distribution channels can also result in financial gains / savings
Examples of concentric mergers
- Citi & Travelers - This merger between Citicorp (a commercial bank) and Travelers (a financial service company) from the late ‘90s is often the prime example of a concentric merger. At the time of the deal, the headlines sang of a “record deal,” and it received a great deal of attention. While the deal has received a great amount of criticism, it certainly set out to accomplish the aforementioned goals of concentric mergers.
- Coke & Vitamin Water - When Coke announced its plan to buy Vitamin Water in 2007, it gave the company an even stronger foothold in the Beverage industry - a smart move at a time when more beverage consumers were looking for options other than soda.
- Nextlink and Concentric Network Corp - When these companies merged in 2002, they combined Nextlink’s national broadband communications services over fiber optic and broadband wireless facilities and Concentric’s internet solutions for small and medium-sized companies, including digital subscriber line access, Web hosting and e-commerce. This merger allowed the newly formed company to offer differentiated services to the small and medium business customers they were already successful serving as separate entities.
The Largest Concentric Merger in History
The 2015 merger of Heinz and Kraft valued at around $100 billion, is thought to be the largest concentric merger in history. The deal created Kraft-Heinz, a food industry behemoth whose 2019 revenues were $24.97 billion.
At the time of the transaction, Kraft was a leading producer of mayonnaise, salad dressing, cottage cheese, natural cheese and lunch meat. Heinz, meanwhile, was the world leader in meat sauce, pasta sauce and frozen appetizers.
So in the nature of a concentric merger, their products were more complementary than competing.
Advantages and disadvantages of concentric mergers
- Reduced costs/economies of scale - the sharing of resources and locations/facilities results in reduced costs and achieving economies of scale
- Reduced risk - diversification always comes with risks, but since the acquirer is operating in the same industry with the same or similar customers, diversification via concentric mergers is considered less risky
- Reciprocal relationship of products/services - when one product or service does well, it tends to positively impact the other
- Smaller scale of diversification - Again, since the acquirer will be operating in the same market, the level of diversification is generally considered smaller; while this might not be a “disadvantage” per se, it should be considered if large scale diversification is a strategic goal
Studies show that executives view diversification as a less risky route to growth, perhaps making concentric mergers more appealing since they offer expanded products and/or services to an existing shared customer base.
As with all deals, however, value estimates may look promising on paper, but unless a deal is executed with best practices, such as clear communication, robust due diligence, and thoughtful integration planning and follow through, the capture of synergies and profit gains are not guaranteed.