Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions

Types of Mergers and Acquisitions for CMA Final

Updated 11 October 2026 · Fact-checked

Mergers and acquisitions (M&A) are ways in which firms combine or change control. In a merger, two or more companies become one. In an acquisition, one firm buys control of another. To answer questions, identify the form, classify the type (horizontal, vertical, conglomerate), and link it to the motive.

Understand Mergers and Acquisitions: Concepts and Types

A merger is a combination in which two or more companies join and carry on as one business. An acquisition or takeover is the purchase of enough shares or assets of a target to gain control. In a takeover the target may continue to exist as a separate company. In a merger the identity of at least one company usually ends.

The word amalgamation is used in company law and accounting for a merger. It has two common forms. In absorption, one company takes over another, and the transferor company is dissolved. In consolidation (also called amalgamation proper), a new company is formed and all the old companies are dissolved into it.

A demerger is the opposite: a company transfers one or more of its undertakings to another company, often a new one, whose shares go to the original shareholders. It is a form of restructuring. Its aim is usually to separate businesses and unlock value.

By the business relationship between the firms, M&A has three main types. Horizontal: firms in the same line of business, often competitors. Vertical: firms at different stages of one supply chain; it can be backward (towards suppliers) or forward (towards customers). Conglomerate: firms in unrelated businesses. A concentric (or related diversification) merger links firms in related but not identical businesses; some books list it separately.

The motives are why firms do deals. Common ones are economies of scale, synergy, market power, access to technology, brands or markets, diversification of risk, tax benefits, use of surplus cash, and growth faster than organic expansion. Exam answers should tie the motive to the type. For example, horizontal deals aim at scale and market share, vertical deals at supply security and margin capture, and conglomerate deals at diversification.

Also note the way a deal is received. A friendly takeover is agreed with the target's management. A hostile takeover is made against its wishes, often by a direct offer to shareholders.

Key rules to remember

Synergy: Synergy = Value of combined firm − (Value of A + Value of B); A deal creates value only if synergy is positive after the premium paid and the costs of the deal.
Net gain to acquirer: Net gain = Synergy − Premium paid; Premium = Price paid for the target − Its stand-alone market value.
Classification rule: Same business = horizontal; different stages of one chain = vertical; unrelated businesses = conglomerate; Use the relationship between the firms, not their size.

How to solve Mergers and Acquisitions: Concepts and Types questions

Use this order for any theory or case question on the concepts and types of M&A.

1Read the facts and note what each company does, and where it sits in the supply chain.
2Name the form: merger, amalgamation (absorption or consolidation), takeover, or demerger.
3Classify the type: horizontal, vertical (backward or forward), or conglomerate.
4State the likely motives and link each to the facts given in the case.
5Say whether the deal is friendly or hostile, if the facts show it.
6Note the main benefits and risks, such as synergy, integration problems and regulatory limits on competition.
7End with a short conclusion or recommendation that answers exactly what was asked.

Quickest way: Three-question classification

When to use it: For MCQs and short case questions where you must name the type or form in under a minute.

Ask: do the firms make the same product or service? If yes, horizontal.
Ask: is one a supplier or customer of the other? If yes, vertical; supplier means backward, customer means forward.
Ask: are the businesses unrelated? If yes, conglomerate.
Ask: did one company vanish into another, or did a business get split off? Absorption, consolidation or demerger follows.

Common mistakes in Mergers and Acquisitions: Concepts and Types

Treating merger and acquisition as the same thing in every case.
Both words are used together in news and in the chapter title.
Fix: State that in a merger the combining firms become one, while in an acquisition one firm gains control and the target may survive.
Calling a deal vertical because the firms are in the same industry.
Students focus on industry and ignore the supply-chain position.
Fix: Check whether the firms are at different stages. Same stage and same product is horizontal.
Mixing up backward and forward integration.
The direction is judged from the wrong company.
Fix: Judge from the acquirer. Buying a supplier is backward. Buying a distributor or customer is forward.
Confusing absorption with consolidation.
Both are called amalgamation.
Fix: Absorption: an existing company survives. Consolidation: a brand-new company is formed.
Listing motives without linking them to the case.
Students memorise a generic list.
Fix: Pick two or three motives that fit the facts and explain each in one line.
Calling a demerger an acquisition.
Both involve transfer of a business.
Fix: A demerger splits a company and usually gives shares of the new entity to existing shareholders; it is a restructuring.

Worked examples

Example 1

A large Indian steel maker buys a captive iron ore mining company to secure raw material supply. A tyre company buys a rival tyre company. A cement firm buys a hotel chain. Classify each deal and state one motive.

Show the solution

Steel maker buys an iron ore miner: the miner is a supplier, so the acquirer moves backward in the chain. Type: vertical (backward integration).
Motive: secure raw material supply and control input costs.
Tyre company buys a rival tyre company: same product, same stage. Type: horizontal.
Motive: economies of scale and greater market share.
Cement firm buys a hotel chain: the businesses are unrelated. Type: conglomerate.
Motive: diversification of business risk.

Answer: Steel and ore: vertical (backward). Tyre and tyre: horizontal. Cement and hotels: conglomerate.

Example 2

Company P and Company Q merge. Both are dissolved and a new company R takes over their businesses. Separately, Company S transfers its retail division to a new company T, and S's shareholders receive shares in T. Name each form and explain the difference from an acquisition.

Show the solution

P and Q dissolve and a new company R is formed: this is consolidation, a type of amalgamation.
In an absorption, one existing company would have survived. Here none does.
S transfers a division to T and its shareholders receive T's shares: this is a demerger.
A demerger splits a company and the owners remain the same, now holding shares in both entities.
An acquisition is different: one firm buys control of another, usually by paying the target's shareholders.

Answer: P and Q to R is a consolidation. S to T is a demerger. Neither is a simple acquisition, because in an acquisition one firm buys control of another.

Exam tips

In case questions, always name the type and give the reason from the facts. A bare label earns few marks.
Write backward or forward whenever you say vertical.
For motive questions, give four or five points with a one-line explanation each, not a list of words.
Do not mix up the forms: a demerger is not a type of acquisition.
Keep a short line on risks, such as integration problems and regulatory control, to make the answer balanced.

Practice questions from Valuation in Mergers and Acquisitions

Mergers and Acquisitions: Concepts and Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Mergers and Acquisitions: Concepts and Types: frequently asked questions

What is the difference between merger and acquisition?

In a merger, two or more companies combine and become one business. In an acquisition, one company buys control of another, and the target may keep its separate existence. In practice the terms are often used loosely.

What are the three main types of mergers?

Horizontal mergers join firms in the same business. Vertical mergers join firms at different stages of one supply chain. Conglomerate mergers join firms in unrelated businesses.

What are the main motives for mergers and acquisitions?

Common motives are synergy, economies of scale, market power, access to technology or markets, diversification, tax benefits and faster growth. In an answer, link each motive to the facts of the case.

What is a demerger?

A demerger is a restructuring in which a company transfers one or more undertakings to another company. The original shareholders usually receive shares in the new entity. It is often done to unlock value from separate businesses.