Learn About Mergers and Acquisitions: The Basics

Question mark made of puzzle piecesMergers and Acquisitions play a huge part in the world of corporate finance. These events happen on a regular basis and can have a lasting impact on the companies involved. When investing, or thinking of starting to invest, it is important to understand what a Merger or Acquisition is, and why a company may participate in one.

What is a Merger?

A Merger is when two companies or businesses join to become one entity. With this, there is commonly a significant process of restructuring of the corporate leadership of the company.

Common Types of Mergers:

  • Horizontal Merger – This is a merger between two companies that are in direct competition. They share the same product lines and market.
  • Vertical Merger – This is when a customer, or purchasing company, and a supplying company join together. For example, if a cone supplier were to merge together with an ice cream company.
  • Conglomeration – This is a merger between two companies that do not have any common products or areas of business. 

What is an Acquisition?

An acquisition is when one company (A) takes over or buys another company (B) and establishes themselves (Company A) as the new owner. Company B can still exist and function as an independent legal entity, while Company A controls everything as the owner. 

What is Synergy?

This is a term that is commonly used when talking about mergers and acquisitions. Synergy is the potential financial benefit that can be accomplished by the combining of two companies. The most common reason behind a merger or acquisition is to improve the company’s financial performance and have greater efficiency. This can be called a “synergy merge”.

What means are used to acquire a Company?

An acquiring company does not always need to use cash to purchase another company. Strictly cash, stock-for-stock, or any combination of both will work. Something to keep in mind is that a transaction with stock is not taxable.

What are common reasons behind mergers and acquisitions?

There are two major reasons a company will participate in a merger or acquisition.

  1. They want to strategically fill a gap in their product, resources (employees) and/or capabilities as a company.
  2. Their goal is to have the company enter a new market.

While there are other benefits and reasons to participate in a merger or acquisition, they are usually secondary.

Mergers and acquisitions require a lot of careful planning and negotiation. Owners and managers tend to focus on the possibilities and opportunities of the new entity, leaving the details of the business and legal agreements to others. It is important to recruit the guidance of legal expertise to ensure that the process goes as smoothly as possible. The experienced business law team at O’Keeffe O’Brien Lyson Foss can help your business handle an upcoming merger or acquisition to ensure that your company understands the legal and financial pieces of the process. Contact our team today. 

Photo Courtesy of  Horian Varlan/Flickr