You have heard the term “mergers and acquisitions” (M&A) many times. What does it mean?
Our friends at Focus Law LA can tell you that a merger occurs when two businesses combine operations and function as one entity. An acquisition happens when a company takes over another, and the acquired company acts as a subordinate or its operations are folded into the purchasing one. There are many varieties of mergers and acquisitions, and they don’t always neatly fit into one category or another.
What’s The Difference?
The significant differences are:
- Merger: Two companies of comparable or equal size combine their workforce, assets, resources, operations, and employees and function as one entity. Often, a new entity and brand are created
- Acquisition: A stronger company purchases a smaller or weaker one. The acquired company is incorporated into the purchaser. Some operations may be sold or shut down and integrated into the purchaser or may become a subsidiary
- Usually, mergers are considered “friendly” because of their relatively equal bargaining power, while acquisitions may or may not be friendly. Owners may welcome the purchase, but they may resist it to negotiate a higher price or object to their company being taken over.
How business operates isn’t always this clear-cut. A takeover may be “hostile” until a high enough offer is made, then the target company’s owners welcome it.
What Role Does Valuation Play?
The target company’s worth, or potential worth, is a critical factor. The company wanting the merger or acquisition may see the target as undervalued, and its investment will create a good return. The target may have a lot of cash, valuable intellectual property, a broad customer base, or a product expected to do well. The two may also complement each other. The larger company has some weaknesses that the smaller one may address, or vice versa.
How High A Premium?
Sellers in acquisitions want to know they’ll benefit more from the acquisition than maintaining the status quo. No one likes to sell at a loss unless the company has serious financial options and the offer represents a lesser loss than continuing without the sale. A vital part of a sales agreement is a price guarantee. The buyer may need to generate cash, go into debt, or offer stock in their business.
In a merger situation, there may be an exchange of stocks, stock ownership, cash, or a mix. Though stockholders may not get a cash or stock bonanza as if they sold the business, they must be convinced the move will benefit the company and their financial interests.
What Are Warning Signs That A Merger Or Acquisition May Not Work?
Significant causes of merger and acquisition failures include:
- Lack of funding or capital
- Valuation disputes between the companies
- Government restrictions or regulations
Funding is critical. A business partnership lawyer can tell you that a proposed deal with inadequate funding will fail. The parties may disagree on a valuation and what price should be paid. Depending on who is being bought, their industry, and how competitive their market would be afterward, government regulators may prevent a merger or acquisition or set conditions on it. A merger or acquisition is a process. There may be difficulties, and negotiations may grind to a halt, but the parties may ultimately reach an agreement.
