Horizontal and vertical types of mergers and acquisitions

Depending on the adopted criterion, different forms and types of the processes of mergers and acquisitions are differentiated. Division of forms encompasses the structures of business mergers, whereas classification by type takes into account the type of merger in each of its forms²⁵. Basic forms include business concentration, integration of operations and coordination. Within the aforementioned forms, there are several types of mergers, the number of which varies according to the views of the authors. For the purposes of this paper, types of mergers are important, as they contain the problem of knowledge transfer in a more visible manner. P.J. Szczepankowski gives five types of mergers²⁶: horizontal, vertical, product, conglomerate and geographical, but for example H. Johnson²⁷ limits to four types: horizontal, vertical, concentric combination and conglomerate. In turn, M. Lewandowski and N. Kulpa²⁸ examine even more limited number of types – integration: horizontal, vertical and conglomerates. Knowledge transfer issues are most likely to occur in two types of business combinations: vertical and horizontal. As horizontal merger understood is a merger of two or more companies, operating in the same sector (industry) aimed at increasing market share and/or building a more profitable business using common know-how, patents and operational processes²⁹. The elements of knowledge mentioned in the definition clearly indicate the role of knowledge transfer in the horizontal consolidation of organizations. Of course, horizontal type mergers can also take place in different sectors for diversification purposes, but it is less interesting from the point of view of knowledge transfer. In contrast, horizontal fusions, so-called circulation, occurring when merging companies use the same distribution channels, are of particular relevance to knowledge transfer because they can be carried out not only in the scope of production but also in marketing. The horizontal merger type dominates the iron and steel industry.

25 P.J. Szczepankowski, Fuzje…, op. cit., p. 12.

26 Ibidem, p. 43.

27 H. Johnson, Fuzje i przejęcia…, op. cit.

28 M. Lewandowski, N. Kulpa, Integracja…, op. cit., s. 56.

29 P.J. Szczepankowski, Fuzje…, op. cit., s. 21.

Metallurgical companies are often not at the same level of technical and organizational knowledge, therefore the knowledge components (know-how, patents, etc.) mentioned above should be transferred between the merging companies. This phenomenon is particularly evident when merger has international character and its participants are such large organizations as e.g. Mittal, which has taken over and merged Polish metallurgical enterprises with foreign organizations often standing at a higher technical and technological level.

Synergy plays a special role in the merger process. It can occur in various forms, strengthening market, operating (lower costs by increasing scale, scope of joint action), financial and management forces. Listed as the last „managerial role” gives complementary benefits³⁰. These are mainly management techniques and methods and know-how. A significant transfer of knowledge in management techniques and methods can be observed in the consolidated metallurgical companies in Poland.

Vertical type of merger is a situation in which „entities involved are next to each other in the value chain. The aims here are the synergy benefits and extending to the entire technological process from the acquisition of raw materials to the retail sale of finished products [...]”³¹. P.J. Szczepankowski³² complements, or rather extends this definition by mergers of enterprises related through similar market segments (similar customers)³³. With these types of consolidations, knowledge transfer due to natural reasons will be performed on a smaller scale than in case of horizontal mergers, although knowledge creation can be expected at the interface between the stages of the added value creation process. It will be a knowledge creation phase referred to as a combination that defines knowledge creation in organizations by transforming conceptual knowledge into knowledge system by combining it. An example may be the case given by I. Nonaka and H. Takeuchi³⁴ that the concept of a new product, obtained in the combination phase, leads to construction of a prototype. This product, by simulation, is transformed through internalisation into mass production. Of course, in vertical integration of organizations combining knowledge that is also part of its transfer³⁵ looks somewhat different. Knowledge is connected at the interface between the two phases of the added value creation process, e.g. metallurgical raw material suppliers and processing companies (steel mills) or consumers, demanding proper profiles of metallurgical products. In this particular case of steel-making,

30 Ibidem.

31 M. Lewandowski, N. Kulpa, Integracja…, op. cit., p. 43.

32 P.J. Szczepankowski, Fuzje…, op. cit., p. 34.

33 Ibidem, p. 56.

34 I. Nonaka, H. Takeuchi (eds.), The Knowledge – Creating Company, Oxford University Press, New York 1995.

35 B. Mierzejewska, Transfer wiedzy…, op. cit., p. 23.

there is a situation where, for example, the knowledge externalized in a company supplying the metallurgical industry will be used by a combination with the explicit knowledge that the steelworks already has, which the supplier has been consolidated with through a merger. The transfer of knowledge also appears in other types of mergers, but it is either marginal character or does not occur at all. An example here may be (according to M. Lewandowski³⁶), for example, an enterprise acquired under a family business strategy when the acquired companies are associated with the purchasing company, which may lead to acquisition of patents. There is a link between the incentives for mergers and the types of mergers and acquisitions selected for this purpose. A. Herdan³⁷ in the paper on selected aspects of integration examined the mentioned relation, which was presented in Table 1.

Table 1. Relation between the reasons and the used form of consolidation Motives Forms of consolidation Implementation of the assumed

strategy

Source: A. Herdan (ed.), Fuzje, przejęcia... Wybrane aspekty integracji, Uniwersytet Jagielloński, Kraków 2008, p. 23.

In practice, these actions had to cause changes in the organizational structure of the integrated companies. These changes occurred in configuration of organizational units (groups) due to amalgamation of logistics and distribution services, as well as management of the integrated enterprises. On one hand, they were aimed at broadening the scope of activity and, on the other, slimming down the organizational structure, which, in the second stage of integration (formation of the Polish Steel Works Holding), had gained one level of management. However, efforts to streamline decision-making processes have introduced centralization tendencies, resulting in a certain limitation of autonomy at the lower levels of management.

Undoubtedly, centralization of certain functions (logistics, distribution, R&D)

36 M. Lewandowski, N. Kulpa, Integracja…, op. cit., p. 76.

37 A. Herdan (ed.), Fuzje, przejęcia…, op. cit., p. 52.

resulted in reduction in fixed costs, thus fulfilling the purpose of the undertaken merger. However, strengthening of R&D has resulted in creation of new knowledge, through its transfer between the merged organizations. Vertical integration in the metallurgical industry has also resulted in other changes, such as cash flow, but in this case did not significantly disrupt the integration of organizational structures.

All reasons for mergers and acquisitions discussed in the literature³⁸ had objective character, and stemmed from the company’s situation and the thus defined strategy.