Mergers and acquisitions (M&A) is a practice area of the law, focused on domestic and global transactions aimed at consolidating businesses of two or more companies through legal operations such as mergers, purchase of assets, tender offers, hostile takeovers, among others.
The most common difference between a merger and an acquisition relates to the size of the companies involved.
When one company is much larger than the other, it is likely that it will integrate the smaller one into the larger one in an acquisition. The smaller company may still retain its legal name and structure, but is now owned by the parent company. In other instances, the smaller company ceases to exist completely.
When the companies are of a similar size, they may come together to form a new entity which is when a merger occurs.
In an ‘unfriendly’ deal (or hostile takeover), a target company does not wish to be purchased, but may do so out of necessity. In these instances, it is always considered an acquisition. How the transaction is communicated to shareholders, employees and the Board can therefore also play a role in whether a deal is considered an acquisition or merger.
‘Targeted acquisition’ is a common term used by larger companies who have dedicated corporate development teams. These corp dev teams look for opportunities to acquire smaller companies in order to support their own growth strategies – which may or may not be considered unfriendly deals.
4 stages of M&A deals
M&A deals vary in terms of the complexity and sophistication of the legal operation implemented to carry them out. M&A deals are also used in a wide variety of industries to enable strategic growth for businesses.
Although each M&A deal is not the same, there are usual stages implemented in many M&A transactions, as follows:
1. Due diligence
The financial and legal advisors of the buyer make a comprehensive revision of the financial and legal matters of the target company or assets that will be purchased. The due diligence phase’s purpose is to identify any potential financial or legal contingencies that might affect the transaction. The due diligence findings will be used as the primary source to prepare the contract for the M&A deal.
2. The contract
The legal advisors of the parties prepare and negotiate a contract, which allocates the risks between the buyer and the seller according to the findings made in the due diligence phase. Among others, the contract may be in the form of a stock purchase agreement or an asset purchase agreement.
3. The closing
The contract provides a detailed description of the actions both the buyer and the seller will have to perform to close the M&A points. Each closing is different in consideration of the specifics of the transaction. For example, some closings may require that a governmental authority grants its authorization. Other closings may only depend on each party’s individual actions (i.e., payment of the purchase price, delivery of stock certificates, etc.).
Even if the M&A deal has been closed, the parties may still have to comply with post-closing obligations or actions, such as non-compete or non-solicitation obligations, among others. However, some M&A deals might not have any post-closing obligations.
Merger and acquisition activities involve a variety of complexities and risks.
Analysts should assess these factors, including the expected value arising from a proposed business combination relative to deal price, in addition to the likelihood that the combination will take place and the intended results will be achieved.
They should also consider actions taken by other shareholders, regulators, market participants, and competitors, in addition to transaction specifics, given the potential impact of all these factors on deal completion and valuation.
Types of Merger & Acquisition:
- Acquisition of Assets
- Management Acquisitions
- Tender Offers
Companies enter into corporate restructuring activities such as mergers and acquisitions for a variety of reasons.
Many companies use mergers as a means to achieve growth or gain operational efficiencies. Others seek to acquire unique capabilities or resources, increase market power, or diversify their businesses. In all cases, it is important for both equity and fixed income analysts to understand the motives for mergers and their financial and operational consequences.
Analysts should be able to answer questions such as:
- Does the proposed transaction make economic sense and align with management’s stated business strategy?
- How is the transaction being financed, and how will this financing approach affect company financials?
- How likely is the deal to take place, and what are associated risks?
- In the case of a hostile bid, does the target company have options to successfully fend off the unwanted bid?
- What is the anticipated impact for shareholders? Bondholders?
What Is the Difference Between a Vertical and Horizontal Merger or Acquisition?
Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors. Horizontal integration is the acquisition of a related business. A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry.
Vertical integration refers to the process of acquiring business operations within the same production vertical. A company that opts for vertical integration takes complete control over one or more stages in the production or distribution of a product.