With global markets at a standstill, current economic prospects have forced companies to look for alternative streams of revenue. Companies like Uber who can’t properly function with quarantine in place have been pushed into a series of mergers and acquisition negotiations with a bevy of their competitors. Uber, like many companies, are increasingly viewing mergers and acquisitions as a way to placate investors and stay financially afloat in the storm that’s been 2020. In fact, according to Global Data, there have been some 253 M&A deals with a transaction value of 50 million or more in the first half of 2020 alone.
There are plenty of M&A types, but one strategy that’s growing in popularity is the concentric merger. Concentric mergers take place between two companies that serve the same customer base but offer different products. For example, if a company that produces hot dog buns merged with a hot dog producer, it would be termed a concentric merger. Through concentric mergers, corporations are able to offer consumers one stop shopping as well as catalyze their own growth, as the sale of one product often encourages the sale of the other. Concentric mergers have historically helped diversify niche companies in the past, with McKinsey & Company indicating that the newly achieved diversification helped companies “secure a competitive advantage for their core business”. For example in the 1980’s Disney was primarily a theme park and entertainment company, but after a series of concentric mergers and acquisitions, they now offer a wide umbrella of complementary products including media networks, sports, and film.
With the wide variety of mergers and acquisitions at a company’s disposal, the question is why are concentric deals uniquely attractive? In the age of Coronavirus, companies are looking for quick growth opportunities to make up for lost revenue. Luckily concentric mergers allow companies to efficiently capitalize on an existing portfolio as well as its existing costumer base, as the objective of a concentric merger is to enhance both companies’ services/product lines. Despite coronavirus’s unforgiving grasp on the markets, its pressures will soon ease, and when they do concentric mergers will not go away. Small businesses and startups, unwilling to sell out to industry giants, are increasingly taking advantage of this M&A tool to retain control of their company and increase their market share.
However, a concentric merger isn’t a silver bullet and careful evaluation of the diversification effort is still critical. According to a McKinsey & Company survey, only about a third of survey respondents stated they were able to create value equal to more than 10 percent of their total business through diversification efforts. However, if successful, concentric mergers can be an excellent option to increase revenue for years to come.
Billie Nordmeyer MBA, MA. “What Are the Benefits of Concentric Diversification?” Your Business, 27 Aug. 2019, yourbusiness.azcentral.com/benefits-concentric-diversification-26030.html.
Contributor Joel Baglole InvestorPlace. “4 Of the Hottest Mergers and Acquisitions Right Now.” Nasdaq, 23 July 2020, www.nasdaq.com/articles/4-of-the-hottest-mergers-and-acquisitions-right-now-2020-07-24.
“Different Types of Mergers and Acquisitions (M&A).” Cleverism, 19 Sept. 2019, www.cleverism.com/different-types-of-mergers-and-acquisitions-ma/.