When companies consolidate themselves or their assets, the process falls under the umbrella of mergers and acquisitions (M&As). But what is that umbrella? In what ways are mergers and acquisitions different from each other? How do they work?
How Are Mergers Different from Acquisitions?
Mergers and acquisitions occur when companies consolidate themselves or their assets. However, although the two things are frequently lumped together, they're different and distinct.
The term "acquisition" generally describes a transaction in which one company purchases the assets or stock of another company, whereas "merger" describes a mutual agreement to combine.
Acquisitions happen when one company takes over another and establishes itself as the new owner. In the simplest cases, one company establishes a majority stake in the other company, which doesn't change its name or alter its operations. In others, it's a more complete changeover. There are many creative ways to structure acquisitions, and experienced attorneys add value to the acquisition by not only protecting their client from risk but also by structuring terms that will lead to greater success or less burden in the future.
Conversely, a merger describes two firms that decide to team up and join forces, with one company being absorbed into the other. The resulting entity generally has greater assets, resources, and/or revenue streams.
Friendly or Unfriendly?
There are many well-known companies that are a result of recent mergers and acquisitions. For example, ExxonMobil. ExxonMobil started in 1999 as a $75.3 billion merger between oil companies Exxon and Mobil. Shareholders surrendered their stocks and were issued new stocks to replace them. This is known as a purchase deal and is often classified as a merger.
There are also unfriendly M&As, known as "hostile takeovers," in which one company is against the deal. The acquiring firm actively purchases stakes of the target company in order to gain a controlling interest, which results in a forced acquisition. In 2008, InBev offered to acquire Anheuser-Busch for $46 billion, which shareholders resisted. InBev upped their offer to $52 billion or $70 a share, an amount that swayed shareholders to accept the deal — even though it wasn't favored by much of the company itself.
The majority of mergers and acquisitions are positive, and experienced attorneys know how to not only help their client understand and achieve the best possible terms, but also how to maximize success by creating "win-win" situations for both parties. For attorneys representing clients involved in unfriendly or forced acquisitions, helping clients understand and implement available dissenting shareholder rights is often critical. A thorough and deep understanding of the Corporations Code and all relevant entity documents is essential to putting a client in the best possible position.
Why Do Companies Go Through M&As?
Ultimately the goal of many business owners is to grow their company to the point where a larger entity will buy it out. That transaction is almost always a merger or acquisition, and it is a critical time in a company's history. Additionally, when a company has a lot of competition, it may opt for a merger or an acquisition in order to eliminate that competition. They may decide to merge to acquire a new product line or intellectual property or to tap into new markets. Furthermore, by combining or consolidating business activity, companies can increase efficiency and cut costs or open up new markets. M&As can increase value for shareholders.
How Are M&As Structured?
There are two major ways mergers and acquisitions can be structured.
- Horizontal M&As. These happen when two companies, generally in the same stage and same industry, merge or when one acquires the other.
- Vertical M&As. This kind of merger or acquisition happens when a company buys another in its same industry, but involved in an earlier or later stage of the production or sales process. Think of a mobile phone manufacturer merging with or acquiring a company that makes apps, or a hot dog maker merging with or acquiring a company that bakes hot dog buns.
In addition to the above there are conglomerate mergers, market extension mergers, and product extension mergers. The variety is driven by the fact that the parties involved have a great deal of control over how the deal is structured, and over time this has lead to more and more creative transactions.
How Are M&As Financed?
A company wishing to purchase another company can pay cash, stock, assumption of debt, or a combination. This can happen in a variety of ways.
A reverse merger allows a private company to purchase a public company (generally with limited assets), after which the formerly private company merges into the public company and forms a new public company in the end.
A purchase, on the other hand, occurs when one company purchases another with cash or through the issue of a debt instrument.
Finally, a consolidation merger involves two companies forming a brand new company, with the new entity owning the assets and liabilities of the previous companies.
How Do M&As Affect Shareholders?
Leading up to a merger or an acquisition, shareholders of the acquiring firm may see a drop in share value, and shareholders in the target firm will typically experience a rise in value.
Why? The acquiring firm spends capital to acquire the target firm's share prices. After a merger or acquisition, though, shareholders often experience a rise in stock price, often followed by a favorable long-term performance of the merged company.
To learn more about how Krogh & Decker, LLP can advise your business through M&As, get in touch today.