Mergers and acquisitions is an overarching term used to describe the consolidation of company assets through financial transactions including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management restructuring.

Often, companies need the assistance of M&A advisory to help facilitate these transactions. Outsourced accounting firms and law firms can provide valuable insight throughout these negotiations to ensure the transition goes smoothly for all involved parties.

How Do I Understand Mergers and Acquisitions?

When one company takes over another and a transfer of ownership occurs, the purchase is known as an acquisition. A merger, however, describes the combination of two businesses of approximately the same size. In this case, the involved companies move forward in business as one entity. The process is known as a merger of equals.

For example, Daimler-Benz and Chrysler ceased to exist as separate entities when the two organizations merged. The result of the merger was a new company, Daimler-Chrysler. Both companies surrendered their stocks and new company stock was issued to replace the old. Purchasing deals are also referred to as mergers when both CEOs agree that joining together is in their best interests.

When a larger company aggressively, or hostilely takes control of another company, it is known as an acquisition. When a company uses a significant amount of borrowed money to do this, it is known as a leveraged buyout. Deals are titled either mergers or acquisitions depending on whether the takeover is friendly or hostile and how the company announces the takeover.

What Are the Different Types of Mergers and Acquisitions?

Mergers

During mergers, the board of directors for the two companies approve the combination of their companies and seek the shareholders’ approval. For example, in 1998, a merger deal occurred between the Digital Equipment Corporation and Compaq. Compaq absorbed the Digital Equipment Corporation. Later, Compaq merged with Hewlett-Packard in 2002. The merger changed their stock ticker from HWP to HPQ.

Acquisitions

In its simplest form, an acquisition transfers the majority stake from a company to an acquiring company. This does not necessarily change the acquired company’s name or alter its organizational structure.

Consolidations

Consolidations create new companies by combining core businesses and abandoning old corporate structures. In this situation, stockholders of both companies receive common equity shares in the new firm.

Tender Offers

During tender offers, one company offers to purchase the stock of another company at a different price than the market value. The acquiring company bypasses the management and board of directors and makes the offer directly to the shareholders.

An example of this type of deal can be found in the Johnson & Johnson acquisition of Omrix Biopharmaceuticals for $438 million. Because Omrix Biopharmaceuticals was allowed to continue to exist, the tender offer resulted in a merger, as most do.

Acquisition of Assets

When a company executes an acquisition, The company whose assets are being required must obtain approval from its shareholders. The purchase of these assets typically occurs during bankruptcy proceedings and other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firm.

Management Acquisitions

In a management acquisition, also known as a management-led buyout (MBO) a company’s executives take a controlling stake in another company, making it private. The former executives typically partner with a financier or former corporate officers in an effort to fund a transaction. Typically, these are financed disproportionately with debt and the majority of shareholders have to approve.

How Are Mergers Structured?

Mergers can be structured in different ways depending on the relationship between the two companies involved

Horizontal Mergers

Horizontal mergers take place between two companies in direct competition that share the same product lines and markets.

Vertical Mergers

Vertical mergers occur when a supplier and a buyer merge product lines and markets. You can think of a shoe company such as Nike merging with a shoe provider such as Foot Locker.

Congeneric Mergers

Congeneric mergers occur when two businesses that share the same consumer base in different ways, such as a Cable company and a station provider, merging.

Market-Extension Merger

Two companies merge that share the same products in different markets.

Product-Extension Merger

Two companies merge that sell different but related products in the same market.

Conglomeration

Two companies merge that have no common business area.

photo credit: Adobe Stocks

What Are the Financing Methods for Mergers?

Purchase Mergers

In purchase mergers, one company purchases another outright. The purchase can be made with cash or through some kind of debt. One of the attractive components of purchasing a company using this method is the tax benefits it provides. The Acquiring company can write off the purchasable price and the difference between the book value and the purchasable price of the assets. If the purchasable price depreciates, it reduces the payable taxes for the acquiring company.

Consolidation Mergers

With a consolidation merger, a new company is formed and both companies are bought and combined under a new entity. The tax terms are the same as those of a purchase merger.

Key Takeaways

Mergers and acquisitions is a term used to describe a number of financial transactions that occur between companies. Mergers describe a transaction between two separate entities forming a joint organization. Acquisitions describe one company taking over another entity through a variety of means. These types of transactions can be carried out in a multitude of ways including horizontal and vertical mergers, conglomerations, management acquisitions, and tender offers.

The key thing to remember when conceptualizing mergers and acquisitions is that mergers occur when two companies decide it would be mutually profitable to combine forces. Acquistions are typically executed when a company tries to gain a strategic advantage over another. In many cases, these companies are in direct or indirect competition and they do not mutually benefit from each other.