Merger and Acquisition: General Overview
Mergers and acquisitions are used to express the consolidation of companies or assets through numerous types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions4 min read
History of Mergers and Acquisitions
According to the Institute for Mergers, Acquisitions and Alliances (IMAA), since 1985, more than 325,000 mergers & acquisitions (M&A) transactions have been announced in the United States with a known value of almost $34,900 billion. Despite the tremendous impact of the COVID-19 pandemic on the U.S. economy and financial markets, M&A activity performed well in 2020. In 2020, the US market saw approximately 15, 271 M&A deals with a total value of almost $1,125 billion.
Below are some of the largest technology acquisitions of 2020:
Uber agreed to acquire food delivery business Postmates in July, in a $2.65 billion all-stock takeover;
Google announced the acquisition of North in June, without disclosing the amount;
Amazon announced acquiring the self-driving vehicle company Zoox for $1.2 billion;
Mastercard declared the acquisition of Finicity for $825 million in June;
Microsoft announced the acquisition of Israeli IoT security specialists CyberX;
Microsoft announced the acquisition of a UK-based provider of robotic process automation software Softomotive in May for an undisclosed amount;
Facebook declared on 15 May that it was to buy Giphy, the popular searchable library for movable images or gifs ;
S&P Global has agreed to buy London-Headquartered HIS Market in an all-stock deal that values the data provider at $44 billion.
Salesforce has agreed to buy Slack for $27.7 billion.
What are Mergers and Acquisitions (M&A)?
The term Mergers and acquisitions (M&A) is used to express the consolidation of companies or assets through numerous types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions. Differentiating the two terms, Mergers are the combination of two companies to form one legal entity, while in Acquisitions one company acquires another company's assets and/or liabilities. The reasoning behind deciding to enter into a M&A transaction is that two separate companies combined create more value compared to being separate entities, or other reasons include, but are not limited to, the acquisition of certain unique assets or technology, gaining a competitive advantage, acquiring market share, replacing leadership, cutting costs, diversifying products, etc.
There are different methods of mergers and acquisitions, such as:
• asset purchase
• shares purchase
• shares exchange for assets
• shares exchange for shares
M&A transactions generally require shareholder approval if the transaction changes the relationship of the board of directors to shareholders, reducing the ability of shareholders to displace their managers after the transaction is completed. Moreover, subject to certain exceptions, mergers require a shareholder vote on the part of both the target and the acquiring company.
Types of Mergers & Acquisitions
The following describes the types of transactions covered under M&A:
A merger is a stock acquisition where two companies are combined (merged) into one company. Subject to some exceptions, the surviving company assumes all assets, rights, and liabilities of the extinguished company. The merger is governed by the laws of the states of the formation of the companies. The three most popular types of mergers are forward mergers, forward triangular mergers, and reverse triangular mergers.
Once the company decides on an acquisition of another company, there should be several factors need to be considered for the transaction, such as tax issues, management and personnel issues, the legal requirements in the relevant jurisdictions. The legal structure of the companies depends on the type of acquisition. In a simple acquisition, the acquiring company obtains a majority stake in the acquired company, which does not change its name or alter its legal structure. An example of this transaction is Morgan Stanley’s 2020 acquisition of E*TRADE, where both companies preserved their names and organizational structures.
Consolidation is the combination of two or more companies to form a new company. The difference between a consolidation and merger is that in a consolidation none of the predecessor companies survive. Here is an example for more clarification: Two entities, A and B, consolidate to create company C, known as a successor company. In some states, the requirements for effecting a consolidation are the same as for effecting a merger.
Steps in any M&A transaction:
Step 1: Pre-acquisition review: Once the company decides acquire an entity, the important step includes pre-acquisition review, which covers self-assessment of the acquiring company, determination of the valuation and assessment of the growth of the target companies.
Step 2: Search and screen: This step includes searching for possible takeover candidates. The process is mostly scanning for a good strategic fit for the acquiring company.
Step 3: Due diligence of the target: After the company finds a target company in connection with the potential acquisition, the acquirer will conduct detailed due diligence on the target company. The acquiring company will want the target to produce standard documents, such as: corporate records, stockholder information, securities issuances, financing documents, other materials, such as any third-party contracts, warranty and service agreements, any inter-company agreements, third-party actions against the target company, etc.
Step 4: Acquire the target through negotiations: Once all of the above steps are completed, the next is to commence negotiations to strike agree on a price and have the lawyers draft the purchase and sale agreement and with all necessary ancillary documentation. An M&A transaction can take months from the time of identifying a target company, to due diligence, to the legal review and drafting. It is important to consult with an experienced M&A attorney to review the consequences of the proposed transaction, including tax, financial, control, ownership, and other substantives.
It’s all about the efficiency of the negotiation for M&A deals. A successful M&A transaction involves an overwhelming work and resolution of several key business, legal, tax, employment, and liability issues. Achieving success mainly relates to the art of negotiation and the parties' desire to close the deal.
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