Acquisition Classifications

Financial analysts typically classify acquisitions into three types:

1. Horizontal acquisition. This is acquisition of a firm in the same industry as the bidder. The firms compete with each other in their product markets. The Wachovia/First Union bank merger we discussed to open the chapter is a good example. Additional examples are easy to find, including the combination of regional telephone companies Bell Atlantic and GTE that produced telecommunications giant Verizon. Such mergers have been common in the petroleum industry. A recent example would be the 2001 combination of Chevron and Texaco.

2. Vertical acquisition. A vertical acquisition involves firms at different steps of the production process. The acquisition by an airline company of a travel agency would be a vertical acquisition. For example, America Online's (AOL's) purchase of Netscape for $4.21 billion in 1998 was essentially a vertical merger. AOL is a huge on-line service provider, while Netscape provides Internet and electronic commerce software.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

25. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

CHAPTER 25 Mergers and Acquisitions

3. Conglomerate acquisition. When the bidder and the target firm are not related to each other, the merger is called a conglomerate acquisition. The acquisition of a food products firm by a computer firm would be considered a conglomerate acquisition.

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