Mergers and Acquisitions: Small Business Basics

Mergers and acquisitions are complicated transactions that can increase shareholder value, stimulate growth, and provide greater financial strength for the companies involved. By definition, mergers and acquisitions refer to the acts of consolidating companies to gain a competitive advantage in the marketplace. However, it’s important to understand that these terms are not synonymous — while both methods result in two companies joining together, there are different processes involved.

What is a Merger?

When a merger occurs, two companies voluntarily unite to form a new company. Firms that agree to a merger are typically on equal terms when it comes to their size and scale of operations. Once a merger takes place, the new company’s shares are distributed to the shareholders of each original business.

There are five main types of mergers that can be used, depending upon a company’s objectives, including the following:

• Conglomerate — This is a merger that occurs between companies of different business activities. The companies may be in unrelated industries or geographical areas. A pure conglomerate involves two companies that have nothing in common. A mixed conglomerate refers to a merger between companies in different industries that have something in common.
• Congeneric — Also referred to as a product extension merger, a congeneric merger combines two or more companies in the same market with overlapping factors to gain access to a larger group of consumers.
• Market extension — A market extension merger takes place between businesses that sell the same types of products, but in different markets. The goal of these types of mergers is to access a larger market.
• Horizontal — A horizontal merger is one that occurs between two companies within the same industry to eliminate competition and increase revenue by creating one large company.
• Vertical — A vertical merger is the union of two companies that create the parts or services needed for a product merger. The objective is to increase synergy and reduce costs.

Businesses should carefully consider the pros and cons of a merger. Some of the advantages can include consolidating operations, having access to more capital, and the ability to enter a new market or launch new products more efficiently. Not only are mergers time-consuming, but they can be very costly, legally complex, and involve significant changes in the workplace of each company. Significantly, the government can take measures to stop a merger from occurring under Clayton Act if it might substantially lessen business competition or create a monopoly.

What is an Acquisition?

Although the terms are sometimes used interchangeably, an acquisition is not the same as a merger. With an acquisition, one company purchases most of the shares in the firm it targeted to gain control of it. Unlike when a merger occurs, an acquisition does not result in the formation of a new company. Rather, one company is fully absorbed into the other.

Acquisitions are extremely complicated transactions that come with a variety of legal and tax consequences. They are not always voluntary and may involve a hostile takeover. Acquisitions can also sometimes involve liquidation of the company that was purchased.

Small Business Considerations for Mergers and Acquisitions

There are many reasons a company might wish to acquire another, and it’s essential to give careful thought before you enter into one of these transactions. In addition to reducing costs, increasing your bottom line, and obtaining a greater market share, mergers and acquisitions can be a good strategy to expand into a foreign market, and decrease competition. It can also be a way to implement new technology into your business that the other company has already developed.

If you’re considering becoming involved in a merger or acquisition, you must first determine the right structure based on your needs — regardless of whether you’re the acquiring or target company. For instance, if you’d like to continue operating alongside another company, it’s best to conduct a merger transaction. In other cases, an acquisition might make more sense. If you’ve decided an acquisition would be the appropriate method, you will need to decide if a stock purchase or asset acquisition meets your entrepreneurial goals.

Before you agree to a merger or acquisition, you must assess the value of the other company to determine whether the deal is in the best interests of your company and its bottom line. You’ll also need to decide the best method to use for the business appraisal.

Additionally, when you’re involved in a merger or acquisition transaction, you will need to consider a number of critical points when it comes to drafting the sales agreement. These include tax matters, distribution of debts and liabilities, what will happen to each company’s intellectual property, and how liens and third-party contracts will be handled. But there can also be many more legal and practical considerations, depending on the specific facts and circumstances of your situation.

Contact an Experienced California Business Attorney

If you’re considering entering into a merger or acquisition deal, it’s vital to have a knowledgeable business attorney who can advise you and guide you through the process. At White and Bright, LLP, we work closely with business owners and entrepreneurs in California to protect their interests and help them meet their objectives. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.