Mergers and Acquisitions are complex transactions that relate to both business growth and legal rules. Mergers and acquisitions generally occur when two separate companies come together to become one. Mergers are considered different from acquisitions, but their differences are slight. An acquisition is when one company (the acquirer) takes over another company (the target), with the target company ceasing to exist. A merger occurs when two companies of about the same size merge together to form one single new company. In this scenario, both of the two companies cease to exist and a new company is formed. Mergers are typically considered to be more amicable, with the companies agreeing to merge together, whereas acquisitions can happen when the target company does not want to be purchased.
Why Acquire a Company Through a Merger or Acquisition
Merger and Acquisition deals can be worth an extraordinary amount of money. The critical element behind a merger or acquisition is to create shareholder value over and above the shareholder value of the two separate companies, essentially that two companies together are more valuable than two companies separated. One company buying a target company does so in the hopes of establishing a more cost-efficient and competitive company, which can be good qualities to strive for in a difficult economic market.
Ideally, the acquiring company seeks out a synergy in the merger or acquisition. Synergy is the enhanced revenue and cost-savings that should hopefully result from the purchase. In principle, the acquiring company wants to benefit from a number of changes including staff reductions, economies of scale (a larger company can buy more in bulk for a cheaper price), acquiring new technology (assuming that a smaller company may be able to add to the technology of the acquiring firm), and the improved market reach and industry visibility.
There are additional benefits that could potentially result from a merger or acquisition. The acquiring company could end up receiving a qualified staff and new skills that it did not have beforehand. There could even be more capable managers or supervisors with a different outlook on management from having different experiences. Acquiring a company can lead to an expansion of customer base and market, because the acquiring company has access to the previous customers and market of the target company. The products offered by the acquiring company may also change depending on the products of the target company which could appeal to a broader consumer base and market.
Types of Mergers and Acquisitions
There are a variety of different types of mergers.
- A horizontal merger occurs between two companies that are in direct competition with one another, meaning that they share the same product lines and the same market.
- A vertical merger occurs between a customer or a supplier and a company. One of the significant benefits of a vertical merger is that it combines two relationships that could potentially become adversarial into a cooperative relationship.
- A conglomerate merger occurs between two companies that have no commonalities between their businesses, particularly, they operate in different markets. In such a merger there is usually no direct effect on competition.
- A market extension merger takes place between two companies that sell the same product in different markets. This merger tries to ensure that the two companies merged as one will have a larger client base and market to work within.
- A product extension merger occurs between two companies that are selling different, but related products in the same market. The two merged companies intend to combine their products together to expand their market and appeal to a broader range of customers.
Acquisitions, much like mergers, still seek to achieve a synergy and all of the potential benefits that may result from acquiring another company. There are not a variety of acquisition types; however, as all acquisitions involve one company purchasing another.
Methods of Purchasing Another Company
A company looking to acquire a target company will seek to do so in one of three ways, a purchase of stock, a merger, or a purchase of assets.
Purchasing a Target Company With Stock
When purchasing a target company with stock, the acquiring company will buy all or at least a controlling amount of the target company’s stock from their shareholders. In a closely held company stock purchasing is carried out pursuant to a stock-acquisition agreement and several subsequent transactions. The acquiring company can buy the target’s stock with cash, their own stock, or a mixture of both. Additionally, even in a closely held company, there need not be consent of a vote from the board of directors or shareholders of the target company. Also, it is important to note that the acquiring company then assumes all of the assets and liabilities of the target. This can have a significant effect if the target’s liabilities exceed their assets and may become bankrupt, making the acquisition of the target company worthless for the purchasing company.
Acquiring a Company Through a Merger
The second type of acquisition purchase is a merger, which in terms of an acquisition means that two companies combine to form one single company, with the purchasing company surviving. This purchase; however, is more transactional and requires input from the board of directors and the shareholders, often times requiring some form of consent. If the merger is agreed upon, the acquiring company will pay the business owners cash, stock, or other assets to acquire the target company. When the merger is complete, the surviving, purchasing company will most likely take on the assets as well as the liabilities and obligations of the target company, including debt and any lawsuits that were pending against the target company.
Acquiring a Company Through the Purchase of Assets
The third form of acquisition purchase is to purchase assets. With type of purchase, the acquiring company has the opportunity to choose what assets to take responsibility for and which ones to avoid, thus leaving liabilities with the other company. In this scenario, the two companies exchange assets with one another for cash, but do not actually merge with one another. The two companies remain separate from one another and continue to operate on their own after the exchange of assets.
Potential Drawbacks of Purchasing a Company
Although mergers and acquisitions on paper tend to show great benefits, they can fail. Combining two separate companies in the hopes of achieving greater market value as one company is not a guaranteed result of merging with or acquiring another company. Businesses that have acquired a new company may spread their time too thinly and fail to focus on other essential business matters. Additionally, there is often an issue with cultural differences between the two companies. This difference in corporate culture can be difficult and time consuming to remedy, because personnel issues are not the easiest to overcome. Having such an issue in the work place can lead to potential resentment to those of the acquiring company as well as decreased productivity from employees. As a business strategy, a merger or acquisition can look like the best choice, but there are repercussions from doing so that may lead to a potential failure of the merger or acquisition.
Mergers and acquisitions are crucial to businesses, but also relate to several areas of law, including corporate law, tax law, securities and antitrust law, labor and employment law, and even sometimes environmental law. There are a lot of factors to consider before deciding to buy another company, and regardless of such factors, acquiring a company will always carry substantial risks.