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Mergers and Acquisitions (otherwise known as M&A’s) are terms that are often used interchangeably when describing two companies joining forces.
There are significant differences between the two, in the way they happen and in the potential consequences for the companies involved.
Many acquisitions and mergers that take place do so between companies that have an already established commercial relationship. The reasons to join forces can vary and often relate to the want to expand product offerings, increase market share and reduce costs.
What is a Merger?
From a legal perspective, a merger is where two, or more, companies come together and consolidate into a new enterprise.
This enterprise will normally take on a new name, ownership and management.
The decision to merge is a mutual one for all parties involved. The merging companies are pooling their resources and combining forces to gain certain benefits or competitive advantages.
These can include:
• Increasing market share
• Gaining entry into new markets
• Increasing revenue
• Widening profit margins.
Usually in mergers, the parties have similar size and scale operations, and treat each other as equals.
An example of a merger is the formation of the pharmaceuticals brand GlaxoSmithKline, where in 2020 Glaxo Wellcome and SmithKlineBeecham were merged together in order to establish the well-known company we see today.
What is an Acquisition?
An acquisition is where one company acquires the business of another company. This process does not result in a new company emerging, instead the acquiring company absorbs the purchased company along with its assets. This is why an acquisition can often be referred to as a ‘takeover’.
The company doing the taking over usually is stronger than the smaller and weaker company that is being purchased, and not all takeovers are done via mutual agreement. You can have hostile takeovers, where one company takes over the operations of another without its consent or a takeover that has resulted from a company being brought whilst in administration.
Motives for acquisition can be similar to those of a merger, and typically centre on gaining a competitive advantage by combining resources with another enterprise in the same or in a similar market.
In acquisitions it is often the case that the smaller company will continue its operations but do so under the name of the larger company. Meaning it will effectively cease to exist under its old name. However, in some situations, the acquiring company may choose to retain the name of the company it has acquired. One such example is Amazon’s takeover of the retailer ‘Whole Foods’.
In addition, the acquiring company may choose to either retain or reduce the staff of the company it has acquired. As a result of the above, acquisitions often carry more negative connotations than mergers.
Main Differences Between Mergers and Acquisitions.
Although mergers and acquisitions may have similar driving motives (such as expansion, market share increase, reducing costs and boosting profits), there are major differences in the decision-making and the processes involved.
• In a merger, the companies involve decide jointly to form a new business entity, agreeing this by mutual consent.
• In an acquisition, one company completely takes over the other’s operations.
• A merger involves creating a completely new company name to trade under.
• An acquisition usually involves the acquired company operating under the parent company’s name, but in some cases, it may retain its original name, if permitted to do so.
• Companies that merge are usually similar in size and structure.
• When one company acquires another the company purchasing is usually larger, financially stronger and more powerful.
• In merged companies, the power is spread between the parties involved.
• In an acquisition, the acquiring company exerts absolute power over the company it has taken over.
Private and Public M&A
How both mergers and acquisitions work differs depending on whether they are private or public.
In private acquisitions, there are fewer rules and regulations. One company buys another by acquiring all its share capital and acquires all of its assets, usually without having to consult third parties.
Private transactions can also involve management buy-outs and management buy-ins.
In a management buy-out, the company’s own management team acquires it, with private equity or debt financing support.
In a management buy-in, the acquisition comes from a management group external to the company, which then replaces the current management team.
Public transactions are different as they involve companies with shares traded on public stock exchanges, with numerous shareholders.
There are rules and regulations to protect investors, the major one being the Takeover Code. This authority regulates areas such as the terms of an offer and the offer’s timetable.
What Parties are Involved in M&A?
Although mergers and acquisitions are different from each other, they have fundamental things in common.
The motives for undertaking them can be broadly similar, and they also have in common these parties involved:
All mergers and acquisitions have a buyer and seller along with a ‘target’. A target firm or target company refers to a company chosen as an attractive merger or acquisition option by a potential buyer. In these types of transactions, management will be involved, as will key advisers on both the buying and selling side of the transaction.
What Law Governs M&A?
M&A in the UK comes under common law and the main principle here is caveat emptor, or let the buyer beware.
When someone buys a company or business, their statutory protection is very limited. Buyers assume the risk and therefore are responsible for finding out sufficient details about the company they intend to purchase. This is done through a process known as due diligence, where a comprehensive appraisal of a business is undertaken by the prospective buyer.
Acquisition and Merger transactions can be complex and can have considerable impact on the parties involved, especially those companies that become targets for acquisition. It is therefore important to carry out extensive research and be advised correctly throughout the entire process.