Mergers and acquisitions involving private and public companies entail a number of key legal, business, human resources, intellectual property and financial issues. To successfully navigate the sales of companies, it is important to understand the procedural features of such a transaction and take into account possible problems and risks. In this article, we will look at the main points to consider when merging and acquiring businesses.
What Are Mergers and Acquisitions?
Mergers and acquisitions are the process of combining two companies into one. The term Mergers and Acquisitions (M&A) refers to the process by which one company joins another, either by amalgamation (the merger process) or by the acquisition by one company of another to incorporate into a larger business (acquisition process). M&A transactions can point to any transaction of this type.
Difference between Merger and Acquisition
Strategic mergers and acquisitions are understood as the combination of two or more business entities, which entails their restructuring. Such transactions are aimed at achieving better interaction within the organization in order to increase their efficiency. However, there are key differences between mergers and acquisitions in terms of procedures and outcome.
A merger occurs when separate organizations decide to join forces and create a new legal entity. Acquisition of a company is a process when a larger and more financially stronger organization absorbs and takes over a smaller one. The latter ceases to exist, and all its operations and assets are acquired by a larger commercial enterprise.
What Is a Merger?
Mergers are transactions in which two or more separate businesses are merged into a new entity. The combined entity usually receives a new name, ownership, and employees from both companies. The decision to enter into a merger is always mutual, as companies join forces to achieve certain benefits, even at the cost of weakening their individual powers. Mergers may be motivated by:
- expansion of market share;
- entering new markets;
- lower operating costs;
- increase in income and profits.
The parties to the contract are generally similar in size and scope of operations. The newly formed company issues new shares and the shares are distributed proportionally to the existing shareholders of both parent companies.
What Is an Acquisition?
Acquisition or takeover of a company means that one organization acquires the business of another. The buyer must acquire at least 51% of the shares of the target company in order to gain full control over it. This usually happens between two companies, with the financially stronger organization acquiring the smaller one. Unlike mergers, when acquiring a company abroad, the decision to take over does not have to be mutual. There are so-called hostile takeovers, when one company takes over the operations of another company without the consent of the latter.
After the takeover transaction is completed, the smaller company continues its activities under the name of the larger one. The buyer can choose to keep or fire the staff of the acquired company. In fact, the acquired company ceases to exist under its former name and operates under the name of the acquiring company; only in some cases, the acquired company retains its original name. New shares are not issued. The main objective of an acquisition is to obtain a better competitive advantage by pooling resources with another entity.
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Conducting an M&A deal: Benefits and Goals
As a rule, entrepreneurs decide to conduct M&A in order to get some benefits that are associated with efficiency and new opportunities:
- Increase in market share. Assuming that two companies operate in the same industry, pooling their resources can lead to an increase in market share.
- Extended distribution options. Through geographic expansion, firms can expand their distribution network or service area.
- Reduced labor costs. Eliminating staff redundancy can help reduce costs.
- Expanding the talent pool, from which a new, larger company can draw, can facilitate growth and development.
- Expanded financial resources.
At the same time, it is important to understand that the execution of a mergers and acquisitions transaction can take quite a long time. The M&A process is intense and can take months or even years to complete. In addition, such transactions are usually accompanied by a comprehensive verification of the object of the transaction, which also requires time and resources. Proper due diligence is necessary to ensure that the acquiring company fully understands the position of the target firm and considers the risks involved.
M&A Process: Merger Deal Requirements
It is important to understand that the conclusion of an M&A transaction includes the following steps.
Preliminary discussions and non-disclosure agreements
The first step in the M&A insights process is usually a discussion between potential buyers and sellers. This is the stage where companies have the opportunity to discuss how the merger will proceed and what goals can be achieved through the merger.
Before proceeding to the exchange of more sensitive information, the parties are advised to enter into non-disclosure agreements so that potential buyers cannot use this data for personal purposes.
Assessment of the purpose and due diligence of the merger transaction
When conducting an international M&A transaction, it is necessary to identify and evaluate all significant risks and problems. The first step is to prepare a market assessment. If buyers are not familiar with the market, they need help understanding the business and its position in the market. In addition, a strategic assessment of the business should be carried out and the availability of audited historical financial statements should be assessed. Due diligence is an important step in the M&A process.
Merger agreement signed and deal closed
Provided that the parties have reached an agreement, during the due diligence phase, both companies sign the final contracts and complete the transaction. There may be a pre-closure period between signing and closing when final arrangements are made to meet all conditions. After all these conditions are met, funds are exchanged for the official closing of the transaction.
Post deal integration
After the closing of the transaction, full-scale integration of the acquired company can begin. This is the last step in the cross-border M&A process. Because it can be equally intensive to complete the transaction itself, it is important that an integration strategy be developed early on and considered along with the due diligence process in merger transactions.