Mergers and acquisitions is a phrase that refers to a way for two companies to combine. A merger is where two companies of similar size combine and become a new entity. An acquisition is where one company acquires the other.
Types of transactions – most commonly called horizontal, vertical or conglomerate.
A horizontal merger is one where you have two companies that are in the same industry and may or may not be competitors. A vertical merger is where you have two companies, such as a supplier or customer. In a vertical merger, the acquiring company is attempting to consolidate its position in the industry. A conglomerate merger is between companies in two different industries.
Forms of transactions – most commonly statutory, subsidiary or consolidation
A statutory merger is most common when the acquiring company is significantly larger than the target and acquires the assets and liabilities. The target company ceases to exist after the conclusion of the transaction. In a subsidiary merger, the target becomes a subsidiary of the acquirer. In a consolidation merger, at the end of the transaction, there is a new company.
Reasons for transactions – mergers and acquisitions can take place for various reasons, such as: economic synergy, where the combined company is worth more than the two companies are separately. Reasons for this are cost reduction or increasing revenues. The acquiring company may see the transaction as a way to quickly get into a new market. Another reason is if a company is in a cyclical industry and wants to maintain a steady stream of revenue throughout the year. There also may be tax advantages.
Types of acquisitions – stock and asset purchase.
In stock purchase, the acquiring company pays the shareholders of the target company. The acquiring company then takes on all of the target’s assets and liabilities, even those liabilities that it may not be aware of.
A stock purchase preserves cash of the acquirer. Also, another advantage of a stock purchase is where contracts of the target contain anti-assignment clauses, the acquirer doesn’t have to worry about negotiating with the other party to the contract.
In an asset purchase, the acquiring company purchases only those assets that it wants to purchase. It may exclude some assets and may purchase some liabilities. An asset purchase will protect the acquirer from any unknown liabilities.
Most deals are asset purchase agreements, as opposed to stock purchases.
Payment for the transaction.
Payment is generally cash, which can be a combination of paying cash and taking on certain contract obligations.
Determining the Price.
This is generally done through some form of valuation. Of course, the acquirer wants the value to come in at the lowest amount, which the target wants the highest amount. Among the types of valuation methods are the Discounted Cash Flow method, the Comparable Company analysis and the Comparable Transaction analysis.