In this article

• Why is M&A so strategic in Business?

• Key Motivations for M&A:

• Vertical vs Horizontal Integration

• M&A Activity and Trends

• Geographic Deep Dive: M&A Trends in North America

• M&A Due Diligence Process

• Conclusion

Why is M&A so strategic in Business?

Mergers and Acquisitions (M&A) are not just about expanding market presence; they also enable companies to diversify their product offerings, enter new markets, and acquire innovative technologies. This strategic approach allows businesses to achieve faster growth than organic methods, streamline processes, and leverage synergies that reduce costs and increase profitability. In a rapidly changing global economy, M&A remains a crucial tool for companies seeking resilience, adaptability, and a competitive edge.

Key Motivations for M&A:

• Market Expansion and Growth: (Horizontal Integration)

  • Access to New Markets: Acquiring companies in different regions or countries helps businesses enter new markets quickly, bypassing regulatory or logistical barriers. This strategy is a good option to enter a market without the need to build a brand reputation in the target geography, since it supposes acquiring an already established company, with a loyal base of customers. Example: Walmart acquiring Flipkart to enter the Indian e-commerce market.

  • Customer Base Expansion: Increases the company’s reach for new customers.

  • This strategy reduces the time to market and pushes growth faster than organic expansion in new territories.

• Economies of Scale and Cost Synergies: (Vertical Integration)

  • Economies of Scale: Combining operations allows companies to reduce costs through larger production volumes, shared resources, and lower procurement costs.

  • Cost Synergies: Redundancies in processes, departments, or technologies can be eliminated, resulting in significant cost savings. Example: Dow and DuPont merger, which reduced overlapping R&D costs and operations.

  • This strategy is very common in market sectors with high R&D spending like Life Sciences and Pharma and is a key option to achieve greater operational efficiency and improved profitability, and consequently more competitive cost-based pricing.

• Gaining Competitive Advantage: (Horizontal Integration)

  • Eliminating Competition: Acquiring competitors reduces market rivalry and increases pricing power. Example: Facebook’s acquisition of Instagram eliminated a growing competitor and enhanced Facebook’s social media dominance.

  • Building Market Share: A larger, merged entity can have greater influence over customers, suppliers, and market dynamics.

• Diversification of Products and Services: (Horizontal Integration)

  • Spreading Risk: Diversifying into new product categories or industries helps mitigate risks tied to a specific product or market. Example: Amazon acquiring Whole Foods diversified its business into physical retail and groceries.

  • Cross-Selling Opportunities: Combining complementary businesses creates opportunities for cross-selling products/services to each company’s customers.

• Access to New Technology, Talent, or Intellectual Property (IP): (Both Horizontal and Vertical Integration)

  • Technology Acquisition: Acquiring innovative technologies allows companies to leapfrog development cycles and stay competitive. Example: Google’s acquisition of YouTube added a powerful video platform to Google’s portfolio.

  • Talent Acquisition: M&A is often used to acquire high skilled talent and industry expertise.

• Improved Financial Performance and Value Creation: (Both Horizontal and Vertical Integration)

  • Tax Benefits: Mergers can provide tax advantages by leveraging losses from one company to offset gains from another.

  • Higher Valuation: Merged entities often achieve higher valuations due to improved profitability, synergies, and stronger market position.

  • M&A provides financial flexibility for future investments.

Vertical vs Horizontal Integration

In Microeconomic theory, M&A is called “Integration”, and there are 2 types of it: Vertical Integrations and Horizontal Integrations.

1. Vertical Integrations

Vertical integration occurs when a company acquires or merges with another firm that operates at a different stage in the supply chain of the same industry.

Types of Vertical Integration:

• Forward Integration: The company moves downstream by acquiring a firm closer to the end customer (e.g., a manufacturer acquiring a retailer).

• Backward Integration: The company moves upstream by acquiring a supplier or producer of raw materials (e.g., a clothing brand acquiring a textile factory).

Advantages:

• Better control over the supply chain and production process.

• Reduces dependency on suppliers and distributors.

• Can increase profit margins by cutting out intermediaries.

• Offers more control over product quality and customer experience.

Disadvantages:

• Requires heavy investment in new areas of operation.

• Reduces flexibility since the company becomes tied to its own supply chain.

• Risk of inefficiencies from managing unrelated operations.

2. Horizontal Integration

Horizontal integration occurs when a company acquires or merges with another firm at the same level as the supply chain or within the same industry. The goal is often to increase market share or eliminate competition.

Example of Horizontal Integration:

• Disney acquiring Pixar: Disney, an entertainment company, bought Pixar to expand its portfolio of animated films and strengthen its competitive position.

Advantages:

• Increase market share by eliminating competitors.

• Economies of scale (e.g., reduced costs due to larger production volumes).

• Access to new markets or customers through the acquired company.

• Improved bargaining power with suppliers or distributors.

Disadvantages:

• It can attract regulatory scrutiny (e.g., antitrust laws) to prevent monopolies and to reduce market power.

• Risk of culture clashes between merging companies.

• Integration challenges, such as operational redundancy or layoffs.

M&A Activity and Trends

Global M&A activity has shown a negative trend after its peak in 2021 and has not surpassed the 2015 level of ~$3.6T. This negative trend that global M&A is facing responds to the post COVID-19 world recession with weakening macroeconomic environment, the high interest rates scenario and the challenging geopolitical context that the world is facing. All these obstacles have pushed companies and investment funds to be more careful at the time to take strategic decisions, since the cost of a mistake are higher in risky situations.

Analyzing by sector, the trend remains consistent, with B2B being the sector with the highest percentage of M&A, representing 36.5% of mergers and acquisitions on average between 2013 and 2024, and totaling 143,529 M&A deals during the analyzed period.

As mentioned, B2B sector represented 36.5% of mergers and acquisitions on average between 2013 and 2024, by deal count. The B2B sector leads in M&A activity due to several key factors. Its fragmented market structure encourages consolidation to gain economies of scale and operational efficiencies. Mergers also provide quicker access to new markets and customer portfolios, by passing on the time and costs of organic growth. B2B companies often pursue acquisitions to integrate new technologies and enhance service offerings, especially in areas like SaaS or automation. The sector’s stable revenue models, built on long-term contracts, make it attractive to investors, particularly private equity firms looking to roll up smaller businesses. Additionally, regulatory complexities in industries like pharmaceuticals or finance drive companies to acquire rather than build compliance capabilities from scratch. This mix of strategic, financial, and operational incentives makes B2B the most active sector for M&A.

When doing the sector`s M&A share analysis by deal value, instead of by deal count, the leader is still the B2B sector but by a smaller difference. 

Between 2013 and 2024, the B2B sector recorded the highest M&A deal value, totaling $8,319.65 billion, leading the market across sectors. B2C followed closely with $7,060.84 billion, driven by increasing consolidation in consumer markets. The IT sector also saw substantial M&A activity, with $6,866.36 billion, reflecting the growing importance of technology-driven acquisitions. Healthcare deals reached $5,087.10 billion, as companies sought scale and innovation amid rising demand for medical services. Financial services, at $4,755.89 billion, pursued mergers to strengthen market positions and respond to regulatory changes. Meanwhile, Energy transactions amounted to $3,503.07 billion, highlighting the ongoing restructuring in the sector, and Materials & Resources, with $2,157.05 billion, reflected relatively lower activity due to fluctuating commodity markets.

Globally, the most repeated M&A deals are those for a value of less than $100 million. This bucket of deal size accounts with the most of the M&A deals worldwide. M&A of less than $100 million represents 76% of all M&A deals that happened between 2013 and 2024.

When doing the same analysis by value instead of by number of deals, the largest share belongs to M&A deals of more than $5 billion, totalizing $10.67 trillion between 2013 and 2024, and representing the 28% of the value of M&A deals that happened in the mentioned period.

Geographic Deep Dive: M&A Trends in North America

In line with the global trend, North America M&A activity registered its highest deal volume and value in 2021, after the huge COVID-19 shock of 2020. After a 2021 record M&A regional value of ~$2,638 billion, North America M&A environment is showing a negative trend, with an 1H 2024 value of ~$879 billion registered in ~8,889 deals.

The first half of 2024 continued to reflect lingering challenges from the post-pandemic macroeconomic environment, marked by residual backlogs across multiple sectors. This period is characterized by persistent high inflation, which has prompted central banks to maintain elevated interest rates. These tight monetary conditions have, in turn, led to subdued investment rates across most industries, as businesses remain cautious amidst cost pressures and uncertain economic prospects. As a result, many sectors are grappling with slower growth, constrained capital flows, and delayed recovery in demand.

Between 2013 and 2024, the B2B sector has consistently held the largest value share within the North American M&A landscape, driven by its foundational role across industries. It is followed by the IT sector, which experienced significant growth, particularly during the pandemic, as the surge in demand for digital transformation and IT services accelerated M&A activity. The B2C sector ranks third, reflecting steady but comparatively slower growth as consumer-driven deals remained more sensitive to economic fluctuations. Collectively, these sectors highlight a strategic shift towards technology-driven solutions and business-oriented services within the region's M&A market.

M&A Due Diligence Process

Due diligence is a critical component in M&A transactions, primarily addressing the challenge of asymmetric information, where one party possesses more or better information than the other. This information gap can create externalities that affect the valuation, negotiation, and potential success of the deal. Conducting thorough due diligence helps uncover hidden liabilities, validate financial health, assess operational risks, and verify strategic fit. By mitigating information asymmetry, due diligence ensures a more accurate valuation, promotes transparency, and fosters trust between the parties. Ultimately, it reduces the risk of post-deal surprises, enabling informed decision-making and improving the likelihood of a successful merger or acquisition.

Among the key steps for an M&A diligence process we recognize the following as crucial:

1. Market Due Diligence

• Market Size and Forecast: Estimate Total Addressable Market (TAM) of target company`s product/service.

• Market trends and growth drivers.

• Demand changes.

• Market Position: Analyze the target company’s market share, competitive positioning, pricing and brand reputation.

• Pricing diligence: Analyze the pricing positioning of the target company compared to competitors, pricing elasticity, key features driving hedonic pricing function.

• Growth Potential: Evaluate the company's growth trajectory and future potential within its industry.

• Customer Base: Assess customer satisfaction, loyalty, and customer churn rates.

• Sales Channels: Review sales channels, distribution networks, and any partnerships or exclusive agreements.

• Product/Service Diversification: Examine product and service lines to identify risk or reliance on a few key offerings.

2. Financial Due Diligence

• Historical Financial Performance: Review the target company's financial statements (income statement, balance sheet, cash flow statement) for the past 3-5 years.

• Quality of Earnings: Assess the sustainability of earnings, profitability, and cash flow generation.

• Revenue Analysis: Identify revenue sources, growth drivers, customer concentration, and seasonality.

• Cost Structure: Evaluate the cost structure to determine profitability and identify potential synergies.

• Debt and Liabilities: Review debt obligations, off-balance-sheet liabilities, and any hidden financial risks.

• Working Capital: Analyze working capital requirements and its impact on cash flow.

• Tax Position: Examine tax filings, liabilities, and potential tax risks or benefits (e.g., carryforward losses).

3. Operational Due Diligence

• Supply Chain: Assess supply chain stability, key suppliers, and potential risks or dependencies.

• Operational Efficiency: Evaluate the efficiency of production, logistics, and distribution processes.

• Technology and Systems: Review IT infrastructure, data management systems, and cybersecurity protocols.

• Human Resources: Examine employee structure, key talent, compensation, and any union or labor issues.

• Contracts: Evaluate contracts with key customers, suppliers, and vendors to identify obligations and termination risks.

• Facilities: Inspect real estate, manufacturing plants, and equipment to assess condition, value, and any required capital expenditures.

4. Legal Due Diligence

• Corporate Structure: Understand the company’s legal structure, including subsidiaries and ownership stakes.

• Regulatory Compliance: Ensure the company complies with relevant industry regulations and laws (e.g., environmental, health & safety).

• Litigation: Review any ongoing or potential litigation, legal claims, or disputes.

• Intellectual Property (IP): Examine ownership of patents, trademarks, copyrights, and licenses to ensure protection of proprietary assets.

• Environmental Liabilities: Identify any environmental risks or liabilities, particularly if the company operates in a regulated industry.

5. Tax Due Diligence

• Tax Compliance: Ensure compliance with local, national, and international tax laws.

• Tax Liabilities: Identify any outstanding tax liabilities or disputes with tax authorities.

• Tax Planning: Assess the target’s tax optimization strategies and potential risks.

• Transfer Pricing: Review transfer pricing agreements and ensure compliance with global standards.

6. Cultural and Management Due Diligence

• Leadership and Management: Assess the quality and experience of the management team.

• Cultural Fit: Evaluate the compatibility of company cultures, especially in post-merger integration scenarios.

• Employee Morale: Analyze employee morale and any potential issues such as turnover risks or culture clashes.

• Succession Planning: Ensure a succession plan is in place for key executives or leadership transitions.

7. Risk Due Diligence

• Insurance Coverage: Review existing insurance policies and identify gaps in coverage.

• Risk Management: Assess the company’s risk management practices and any exposure to operational, financial, or legal risks.

• Contingent Liabilities: Identify potential contingent liabilities that may not be immediately apparent.

8. Environmental, Social, and Governance (ESG) Due Diligence

• Environmental Impact: Assess environmental risks, sustainability practices, and compliance with environmental regulations.

• Social Responsibility: Evaluate the company’s social responsibility practices, including labor practices, diversity, and community engagement.

• Governance Structure: Review the company’s governance policies, shareholder rights, and board effectiveness.

Conclusion

Mergers and Acquisitions (M&A) are crucial for business growth as they provide companies with opportunities to scale rapidly, access new markets, and enhance operational efficiencies. Through M&A, companies can achieve competitive advantages by acquiring innovative technologies, expanding product lines, and eliminating competition. This strategy allows firms to optimize their operations, reduce costs, and increase market share, making it an essential approach in today's fast-paced business environment.

Private Equity (PE) funds play a pivotal role in helping their portfolio companies capitalize on these M&A opportunities. By providing capital, industry expertise, and strategic insights, PE firms enable their portfolio companies to pursue horizontal and vertical integrations. This, in turn, leads to accelerated growth, improved operational efficiencies, and stronger market positioning. M&A activities driven by PE firms allow companies to enter new markets, diversify offerings, acquire cutting-edge technologies, and consolidate fragmented industries, especially in sectors like B2B, where economies of scale and rapid market access are critical.

Additionally, PE-backed M&A transactions create synergies, streamline costs, and enhance financial performance, making companies more resilient in challenging economic conditions. Despite global uncertainties such as rising interest rates and economic slowdowns, PE firms continue to identify opportunities for value creation through M&A, making it a powerful tool for expanding portfolio companies and achieving long-term success.