What Are Mergers and Acquisition?
Mergers and Acquisitions are an integral part of how industries are shaped. They can allow smaller companies to better compete with larger established companies or consolidate market share to increase profits. Being acquired can also offer a smaller business a less costly route to become a public company.
The terms, merger and acquisition, are often used interchangeably but they do not mean the same thing.
Mergers often involve two companies reaching an agreement where one merges into the other.
An Acquisition is where one larger company acquires the majority stake of a smaller company with either cash, stock or both. In an acquisition, the acquired company retains its name and structure.
In both mergers and acquisitions, the company merging into the other company or the one being acquired is referred to as the “target” company.
What Kind of Mergers are there?
There is more than one kind of merger. No two deals are exactly alike, but there are few common scenarios which dictate what kind of merger is occurring.
Listed are a few types of common mergers.
- Vertical: A merger of 2 companies in the same industry, but at different stages of the product chain. Think of a retailer buying its supplier, or vice versa. This is 1 of the 2 most common types
- Horizontal: This merger involves 2 companies in direct competition at the same stage of a product chain. A relevant recent example is an in-progress merger between Sprint and T Mobile. This is the other of the 2 most common mergers.
- Market Extension: 2 companies that sell the same kind of product but in separate markets. For example, an American cable company merging with a Canadian cable company.
- Product Extension: 2 companies that sell different but related products. For example, a shampoo company buying a conditioner company.
- Congeneric: 2 companies that have the exact same consumer base. An example would be a TV manufacturer and a cable company merging.
- Conglomeration: Companies merging with no common business area. Berkshire Hathaway has acquired many different businesses in all sorts of markets.
How Does an Acquisition work?
Acquisitions typically allow for the continued existence of the target company. However, in certain cases, especially with the acquisition of assets the company will only exist on paper. When Company A buys all of Company B’s assets, company B will only have cash. With everything liquidated and no legitimate business area the company, if public, will become a shell or it will have to enter in another area of business.
What is a Shell Company?
Lastly, Shell companies offer an interesting type of Mergers and Acquisitions. Public shells often exist dormant on the OTC markets (Over The Counter Markets). These companies are typically waiting to be acquired by a prospective buyer for the purpose of a Reverse Merger.
What is a Reverse Merger?
A Reverse Merger allows a private company with the desire to go public to avoid going through the IPO process. What typically happens is the private buyer will purchase the shell and merge the private company into the public shell, creating an entirely new public corporation with new shares.
Is Legal Counsel Needed?
Most important with any Merger and Acquisition is to have good legal counsel. Wilson, Bradshaw & Cao, LLP, has securities attorneys experienced in all aspects of Mergers ad Acquisition deals. We work with both buyers and sellers. We also understand the importance of fiduciary duty in matters of Mergers and Acquisitions and we strive to create the best deals for business founders and shareholders.