Mergers & Acquisitions (1/2)
In this lesson, you’re expected to learn about:
– the purpose of mergers & acquisitions
– the three main M&A structures
– variations of mergers
What is the purpose of Mergers & Acquisitions?
Mergers and Acquisitions (“M&A”) is a general term that refers to the consolidation of companies or assets and it includes a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, and purchase of assets.
• Cost synergy
• Market power gains
• Financial gains
• Economies of scale and scope
The three main M&A structures are:
• Statutory merger
• Stock purchase / acquisition
• Assets purchase / acquisition
A merger occurs when two or more companies combine forces to create a new joint entity.
In an acquisition, the buyer or acquirer (“A corporation” or “A”) takes ownership of the stock, equity interests, or assets from the seller or target (“T corporation” or “T”); no new company emerges, rather one of the companies survives and the other ceases to exist.
When choosing the best transaction structure, the companies should take into account factors such as tax, shareholders’ approval, appraisal right of dissenters, regulatory issues, necessity of third-party approval for transfer of contracts etc.
In an M&A transaction, except for specificities of each kind of structure, the general procedure followed is:
The board resolution will approve the M&A agreement that contains the terms and conditions of the deal, the consideration (what is given in exchange), whether or not the T’s shares will be cancelled after the closing of the deal etc.
In a special shareholders’ meeting, they may approve the terms and conditions of the deal. Due notice of the time, place and purpose of the meeting should be mailed to each shareholder at least 20 days prior to the date of the meeting.
This right is a protection policy for shareholders, preventing corporations involved in a merger from paying less than the company is worth to the shareholders.
The quorum* for installation of the shareholder meeting is majority of shares entitled to vote. Majority of all outstanding shares is necessary for the approval of the merger. The dissenting shareholders, who have voted against the deal, have appraisal rights.
The deal is made between the A corporation and T’s shareholders. The T’s shareholders transfer their stocks to the A corporation and may receive in exchange cash, the A’s stock, or a combination of both. Third-party consent is required as the ownership of many contracts will be changed.
A corporation drops a subsidiary corporation to be merged into the T corporation (reverse triangular merger) or into which the T corporation will merge (forward triangular merger).
Usually, the T corporation is an operating company that owns certain goodwill – name, brand, customer base, intellectual property etc. – that are expected to survive after the deal. There is no risk to A’s contracts, as T corporation becomes a subsidiary of A and thus there is no change of the ownership of contracts.
When the A corporation acquires at least 90% of the T’s shares, the A corporation (now the parent corporation) has the right to acquire the remaining minority interests from T corporation, now its subsidiary.
The merger allows A to acquire the rest of T’s stocks without A shareholders’ approval. The T corporation becomes a wholly-owned subsidiary and its shareholders will have appraisal rights.
The short-form merger is usually the second step of a merger: a tender offer (1st step) followed by a short-form merger (2nd step) concludes the deal. Usually, both the 1st and the 2nd step have the same price paid per share.