What are mergers and acquisitions? And what exactly does a merger and acquisition advisor do?
Sometimes, the sum of two companies working together can be greater than the parts. Many companies try to achieve this through strategic partnerships – when two or more companies work very closely together for mutual benefit but stay separate. Others choose acquisitions, mergers, and other types of transactions to fully meld two businesses together.
What are the benefits to both companies in joining together? Increased market share, economies of scale, product and service diversification, risk diversification, geographic expansion, and cross-selling opportunities drive many M&A transactions.
Sometimes, a company may hit trouble and another company sees the benefit in taking ownership of the company and turning it around. There are often distinct tax advantages to the acquiring company on those types of transactions too.
In this article, we examine the main types of M&A transaction including:
● acquisitions of assets,
● management acquisitions,
● reverse mergers, and
● tender offers.
The acquisition of a company involves the transfer of all (or a majority) of the shares in a target company to the acquiring company. The acquiring company may keep the target company as a separate entity or they may transfer the assets and liabilities of the target company to the acquiring company before dissolving the company they’ve bought.
On most occasions, all shareholders have to agree to the sale of a company in which they own shares. This is a block causing many acquisitions to fail – indeed, many acquirers set pre-conditions to the owners of target companies requiring them to prove that minority shareholders may not block a sale prior to proceeding.
If there is in place a shareholders’ agreement requiring minority shareholders to sell their shareholdings when an acquirer convinces shareholders whose collective ownership of shares exceeds 50%, this may act as reassurance to the acquirer that the deal is worth pursuing.
ACQUISITION OF ASSETS
The acquisition of assets, sometimes called an asset sale, involves the sale of selected assets owned by a business to an acquirer. The acquirer does not purchase the shares of the business and they have no ownership stake of any kind in the business whose asset(s) they have bought.
The target company continues to exist with no change in the shareholders’ register. Often, the target company will be forbidden from competing against the acquirer of its assets for business through the use of restrictive covenants.
There are two types of management acquisition – buy-ins and buy-outs. These deals are funded by private investors normally with a view to maximising the value of the company prior to a sale in three to seven years’ time.
MANAGEMENT BUY-OUTS (MBOS)
In an MBO, a company’s existing management team buys the shares in that company from its current owners. The deal is funded by an investor however each member of the existing management team who will now own part of the company they work for will be expected to introduce significant personal capital of their own to prove commitment to the funder.
MANAGEMENT BUY-INS (MBIS)
With an MBI, a manager or management team, aided by a funder, purchases the shareholding in another company. MBIs are often launched by management teams when they believe a company is poorly managed by its current owners and therefore undervalued.
When they take ownership of the business, they dismiss the current management team replacing them so that they can run the company in a way that they believe will maximise the company’s value.
In British law, there is no such thing as a merger however they are a common way for companies to achieve the corporate goals set out at the start of the chapter.
When two or more companies agree to merge, they do so with a view to creating joint ownership and joint business operations. A new company is formed and, either all at once or staged over a certain period of time, the assets, liability, staff, and more are transferred to the new company. The original companies may be kept extant but, in most cases, they are liquidated at some point not long after the merger has been completed.
There are six different types of merger:
● Concentric/Congeneric Merger – used by companies targeting the same target clients by in different ways
● Conglomerate Merger – when two non-competing companies merge even though they share no common business areas
● Horizontal Merger – when two companies in direct competition with each offering similar products or services and targeting the same markets combine forces
● Market-Extension Merger – when two companies selling the same product and services but to different markets join
● Product-Extension Merger – when two companies selling different but related products to the same market combine
● Vertical Merger – a merger between a customer and a company or a supplier and company with complementary offerings to each other
A reverse merger (sometimes called a reverse takeover or a reverse IPO) is used by private limited companies when they want to become public limited companies without having to arrange and execute an initial public offering.
They do this by buying enough shares to gain control over the public limited company and then the shares in the private limited company are exchanged for shares in the public limited company.
With a tender offer, an acquirer alerts all of the target company’s shareholders that they are willing to buy their shares at an agreed price and within an agreed time.
Sometimes, the management team of the target company will endorse the acquirer’s offer but this is not necessary for the transaction to be successful. The acquirer may wish to purchase the company or to encourage enough shareholders to sell to them to create a merged entity.
SPEAK TO AN M&A ADVISOR AT IBA CORPORATE
To find out more about how we work with buy-sell and sell-side clients on mergers and acquisitions and how we can assist you, please get in touch with us.