One of the most exciting aspects of owning and operating any business is the growth phase.
Clients often discuss with us their growth strategy and whether they should merge with another business or acquire a business.
There is no right, or wrong answer and it will really depend on the business, the appetite for growth and the synergies the business may or may not have with a similar type of business that they consider merging with or acquiring.
In this article we will deal with mergers and acquisitions (often called takeovers) of private company businesses, not public companies which have a different set of statutory and compliance guidelines.
Generally, a merger occurs where two companies of similar size decide to merge into the one entity, whereas in an acquisition one company takes over and absorbs the other one and no new entity is created.
Whilst in function they can be similar there are some legal distinctions between the two and it is worth exploring them.
Mergers
There are generally three distinct types of mergers being conglomerate, horizontal and vertical.
A conglomerate merger occurs two companies in industries which are unrelated to each other’s business merge, allowing the merged company to share risk and reduce assets which can open significant opportunities.
A horizontal merger occurs when two companies in similar industries come together who have often been in direct competition with each other whilst reducing competition and costs.
A vertical merger occurs when companies which are part of the same supply chain and not competitors consolidate and strengthen their overall market position.
Acquisitions
Similarly, there are generally three types of acquisitions being Friendly, Hostile and Reverse.
A friendly takeover is when both the board and shareholders of the company consent to the acquisition and subsequent takeover after agreeing to an offer for the price of the shares or in some cases the assets.
In a hostile takeover, the target company board doesn’t consent to the acquisition but it will the shareholders who will ultimately decided to go ahead or not.
A reverse takeover occurs when public company acquires a private company which enables the private company to go public without needing to go through the cost and lengthy process of undertaking an initial public offering referred to as an IPO.
The reasons for mergers and acquisitions
There are a number of reasons that a business might merge or acquire another.
They are:
- Acquire talent and expertise
- Access new markets
- Create synergies
- Diversification of revenue streams
- Increase efficiency and economies of scale
- Reduce or eliminate competition
- Tax planning
- Technology advancement
How do mergers and acquisitions occur?
There are three types of ways the merger and acquisition will happen and integrate being consolidation, statutory and subsidiary.
With a consolidation, both companies cease to exist and a new company is formed that encompasses the original businesses.
A statutory merger is where a larger company acquires the target companies assets and liabilities, thereby disposing of or integrating them into the existing business.
The subsidiary merger occurs when the company that has been acquired becomes a subsidiary of the new parent company and maintains its existing business and continues to operate in the marketplace.
How do you value the company you want to merge with or acquire?
In any consideration for the merger or acquisition of another company there are a lot of legal and financial issues that need to be considered.
One of the most important financial aspects is what is the company worth and how do I value it.
This is where excellent accounting and financial advice from experts is important.
Some of the methods to value a company are:
- Price-to-Earnings ratio which is often referred to as PE where the company’s current share price is compared to its earnings per share
- Discounted cashflow often referred to as DCF where the company’s future cashflow is discounted by a formula to provide an indicative rate
- Comparable company analysis is estimated by comparing to similar business within the same industry
- Comparable transaction analysis
How can FC Lawyers help?
The team at FC Lawyers have assisted business clients of all sizes and industries with their merger and acquisitions requirements for 30 years.
Contact our team today to discuss your business needs and see how we can assist you.
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