Mergers and Acquisitions (M&A) is a strategy of corporate or business management and finance where one business buys either the assets or stock of another and brings those into its existing form (acquisition), or where both businesses combine (merger) to form an entirely new business (surviving corporation or business).
Acquiring or merging with another business is a complicated project, and the advice of a Mergers Acquisitions Attorney can be invaluable to managers and stockholders alike. View qualified Mergers Acquisitions Law Firms in your area to find Mergers & Acquisitions Lawyers to get help with this process.
There are several different types of mergers:
- Vertical merger – between a company and its customer or supplier
- Horizontal merger – of competing companies with similar markets and products
- Conglomeration – of companies that have nothing in common, business-wise
- Product-extension merger – of companies in similar markets that sell different (but similar) products
- Market-extension merger – of companies in separate markets that sell the same products
After the merger, although the two businesses no longer exist, typically, their debt remains and now is the responsibility of the surviving business. Also, some of the rights of the merged businesses, such as legal actions brought but not finished before the merger, survive with the new business.
In addition, for mergers the stockholders of both businesses must vote to approve the merger. Dissenting stockholders have the right to have a separate appraisal of the stock value and to challenge the merger.
Acquisitions typically take one of two forms:
- Share purchase – where one business purchases all (or almost all) of the shares of the other. One advantage to this method is that control of the company’s assets comes under the purchaser’s immediate control. A disadvantage is that the purchased business’s debts are transferred as well. Because the stockholders have apparently already approved the sale of the company by selling their individual shares, typically a shareholder vote is not required.
- Asset purchase – where the purchaser buys the assets of the other business. If all of the assets are purchased, the bought company is an empty shell with little more than a name left. If only part of the assets are purchased (usually the best), this is called cherry picking. Generally, under this scheme, the buyer is not liable for the seller’s debts.
Valuing the Assets
Before the merger or acquisition, a price must be placed on the businesses to be transferred. The most typical methods of valuation include:
- Market analysis – comparing the established value of similar businesses
- Future estimated cash flow (discounted cash flow or DCF) – “discounted” to its present value
- Valuing the company according to the value of the assets
- Earnings history
- Future estimated earnings
Financing the Transaction
There are a variety of methods used in M&A transactions, including:
- Borrowing – either as a loan or by issuing new bonds. If an acquisition is private and debt financed it is called a leveraged buyout.
- Cash – if cash is used to buy a business, the transaction is typically called an acquisition.
- Hybrid – where more than one method is used to complete the transaction.
Securities Law, Business Law, Corporate Law