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The phrase Mergers and Acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow more rapidly without having to create another business entity.

The opposite end of this spectrum is the deal to do a reverse/breakup.  When management has little interest creating a larger company from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outs, or tracking stocks.

Differentiation between Mergers and Acquisitions

Mergers

Although they are often articulated in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a lawful point of view, the target company ceases to exist, the buyer "consumes" the business and the buyer's stock continues to be traded.

In the purest sense of the term, a merger happens when two firms, often of about equal value and size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals do not happen very often. Usually, one company will buy another and, as part of the transaction terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more appetizing.

A purchase deal will also be called a merger when both Chief Executive Officers agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (when the target company does not want to be purchased), it is always regarded as an acquisition. 

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is publicized. In other words, the real difference lies in how the purchase is communicated to and received by the target company's Board of Directors, employees and stockholders.

Synergy

Synergy creates the captivating force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost efficiencies. By merging, the companies anticipate to profit from the following:

Staff reductions: Every employee assumes, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with an agreed compensation package.

Economies to Scale: Size matters. Whether it is purchasing office supplies or a new corporate IT system, a bigger company placing the orders can save costs. Mergers also translate into improved purchasing power to buy equipment or stationary.  When placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Acquiring new technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility: A company buys another company to reach new markets and grow revenues and earnings. A merger may expand both companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment (bigger firms often have an easier time raising capital than smaller ones).

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: 

Horizontal: Two companies that are in direct competition and share the same product lines and markets.

Vertical: The customer and company or a supplier and company. Think of a tire supplier merging with a custom wheel manufacturer.

Market-Extension: Two companies that sell the same products in different markets.

Product-Extension: Two companies selling different but related products in the same market.

Conglomerate: Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument, making the sale is taxable.  Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can be depreciated annually, reducing taxes payable by the acquiring company.

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

Acquisitions
An acquisition is usually only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another.  There is no conversion of stock or a consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. There are, however, times when acquisitions can be hostile.

In an acquisition, as in some of the merger deals, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (or debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition in a reverse-merger a deal that enables a private company to gain a public listing in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company; together they become an entirely new public corporation with tradable shares. 

Regardless of their category or structure, all mergers and acquisitions have one common goal: They are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synerg y is achieved.

The Art of The Deal

The Offer 

When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up the shares in the target company, or building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it must file with the Securities and Exchange Commission. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment.

Working with financial advisors, business counselors, and investment bankers, the acquiring company will arrive at an overall price that it is willing to pay for its target in cash, shares or both. The tender offer is frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it. 

The Response

Accept: The target business’ top managers and shareholders are happy with the terms of the transaction; they will go ahead and the deal is confirmed.

Negotiate: The tender offer price may not be high enough, or considered value worthy, for the target business’ shareholders to accept. Or, the specific terms of the deal may not be attractive. In a merger, there is much at stake for the management of the target (their jobs, in specific). If they are not satisfied with the terms laid out in the tender offer, the target's management may try to work out more comfortable terms that permit them keep their jobs or, even more attractive, send them off with a nicer, bigger compensation package.

Not unpredictably, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are crucial to the merger's future success.

Hostile Takeover Defense

A target company can trigger a hostile takeover defense scheme when a hostile suitor acquires a predetermined percentage of company stock. To implement its defense, the target company grants all shareholders, except the acquiring company, options to buy additional stock at a dramatic discount. This weakens the acquiring company's share and intercepts its control of the company. 

Finding the White Knight As an alternative, the target company's management may seek out a friendlier potential acquiring company, or the white knight.  If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a monopoly or, the very least, a threat to competition in the industry.

 Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some contract. In a merger in which one company buys another, the acquiring company will pay for the target company's shares with cash, stock or both.

A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company.

If the transaction is made with stock instead of cash, then it is not taxable. There is simply an exchange of share certificates. The desire to steer clear of the IRS explains why so many M&A deals are carried out as stock-for-stock transactions.

When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a brokerage firm who manages them for target company shareholders. The shareholders of the target company are only taxed when they sell their new shares.

When the deal is closed, investors usually receive a new stock in their portfolios, the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.

Summary:

One size does not fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. 

M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

While every Merger and Acquisition is unique to the organization under impact, there are logical steps to take to handle and avoid the confusion of how to act.  Business Management Counseling Services can aid your company or organization prior and during this time.  We highly recommend a pro-active approach of preparedness, however when a pro-active plan does not exist we can facilitate the least amount of collateral damage to the event.