What You Need to Know About Mergers and Acquisitions

Mergers and Acquisitions are critical parts of business growth strategies, as they offer numerous ways for companies to expand their operations, access new markets, and improve their overall competitiveness. While both approaches involve combining two or more companies, there are significant differences between mergers and acquisitions. As a business owner, it is important that you fully understand the two approaches to determine which strategy would work best for you and your business.

In this blog post, we will tell you everything you need to know about mergers and acquisitions, their pros and cons, and key considerations when contemplating such strategic moves. 

So, without further delay, let’s dive in and explore the world of mergers and acquisitions.

What is a Merger?

Simply put, a merger is a business strategy whereby two closely related companies form a new legal entity under the banner of one corporate name. When we say “closely related companies,” we refer to companies of the same size and structure and possibly offer identical services. One of the main reasons why two companies merge is to create a stronger and more competitive entity. 

In a merger, the companies involved will pool their resources, expertise, and customer base to create a more efficient and profitable entity. However, it is important to note that before a merger can happen, the board of directors in the companies involved will have to agree on the terms of the merger. This would include how the company will be run and what it will gain from the merger. 

Sometimes, two companies about to merge may agree on sharing the profit amassed equally. Again, this depends on various circumstances, such as the size of the two companies and their worth. 

There are two main types of mergers. They include horizontal and vertical mergers.

• Horizontal mergers: 

This is a type of merger that only happens between two companies that operate in the same market or provide the same services. These mergers are typically done to achieve economies of scale, increase market share, or eliminate competition. A good example of a horizontal merger is two airline companies coming together. When they merge, they may be able to increase their market share and reduce costs by combining their operations.

• Vertical mergers

Vertical mergers happen between companies operating at different stages of the supply chain. A perfect example of a vertical merger can be found in a car manufacturer merging with a tire company. Also, a drink company may decide to merge with a bottling company. This type of merger aims to help increase efficiency in the production process. A vertical merger can also occur when a company wants to acquire its supplier or distributor to gain better control over its supply chain.

Other types of mergers include a conglomerate merger, a congeneric merger, a Special Purpose Acquisition Company (SPAC), etc.

What is an Acquisition?

An acquisition happens when a company outrightly purchases another company. In this form of business strategy, the acquiring company will obtain a majority stake in the acquired firm, meaning that its name or organizational structure does not change, or it can also take full control of the target company by integrating it into its own business or holding it as a separate subsidiary. Aside from the difference in the takeover, another thing that differentiates the two strategies is that in the acquisition, the size of the two companies, particularly the acquired firm, does not matter. Also, they do not necessarily have to be involved in the same business. 

There are two main types of acquisitions, and they include asset acquisition and stock acquisition. In the former, the acquiring company will only purchase specific assets of the target company. This could include their intellectual property, real estate, or inventory. In the latter, however, the acquiring company purchases the majority of the target company’s shares, giving it control of the target company’s operations.

Advantages and Disadvantages of Merger and Acquisition Deals

Merger and Acquisition deals have several advantages as well as disadvantages. We shall first discuss some of the advantages below.

1. Merger and Acquisition helps to increase a company’s market share. This is, perhaps, one of the main reasons why merger and acquisition happens. Who doesn’t like to make more profits and topple their competitors in the process? No one!
2. Merger and Acquisition deals can provide companies access to new products or technology. As they often say, innovation doesn’t end. And the more a company expands its business, the more they get introduced to new products and technologies.
3. Lastly, when two companies merge, that could improve the economy as productivity and distribution will double or even triple.

Merger and Acquisition deals also have some disadvantages. We shall briefly explain some of them below.

1. Merger and Acquisition deals could cause job loss because when new corporation or business entity forms after a merger, the new corporation may not retain the same workers/employees.
2. Deals like this can also consume a lot of time and money. 
3. Merger and Acquisition deals are very risky. Hence, due diligence must be carried out to ensure that the acquiring company fully understands the target company.

Steps Involved in the Merger and Acquisition Process

Mergers and acquisitions deals are not straightforward; instead, it involves several key steps, which include:

1. Identify Potential Targets: The first step in the Merger and Acquisition process is identifying potential targets. Again, this is a process you won’t want to rush. So, to be on the safer side, it is always advisable to hire an expert to help with this.
2. Conduct proper due diligence: Once you have identified a target company, the next step would be to evaluate the target’s financials, operations, and legal and regulatory compliance. Note: never leave a stone unturned!
3. Negotiate Deal Terms: After you have done your due diligence, the next step would be to contact the target company and present your offer to them. Note that it is normal for a target company to reject some of your offers until you make a satisfactory one.
4. Obtain Financing: After a deal has been struck with the target company, the next step would be to obtain financing to pay for the acquisition. You could service the deal using debt and equity financing.
5. Close the Deal: Once the financing is in place and the deal terms have been agreed upon, the acquisition can be closed. This involves transferring ownership of the target company to the acquiring company and integrating the two organizations.
6. Integrate the Companies: The last step would be integrating the two companies. This step is the most important, as the integration will allow the two companies to combine their operations, systems, etc, to create a single organization.

Conclusion

Mergers and acquisitions allow companies to expand their operations, reach new markets and generally improve their competitiveness. They are risky investments, and great care and expertise are required for successful execution. As a result, it’s essential that individuals and businesses looking to merge or acquire consult experienced attorneys throughout the process. 

At Saanichton Law Group, our corporate lawyers have extensive experience handling M&A transactions. We offer detailed and strategic guidance every step of the way that considers the best possible outcomes for your business goals. We understand the various legal, financial, complexity, and risk associated with mergers and acquisitions and how to properly construct an agreement that ultimately benefits all parties involved. If you are thinking about merging with or acquiring another company, contact our team of seasoned experts at Saanichton Law Group today to get started.