What are Mergers and Acquisitions?

Nov 03, 2022

Mergers and acquisitions can reshape a growing company and bail out a struggling one. 

Every significant industry and company has been a part of the mergers and acquisition process, whether buying a rival or establishing a presence in another industry. 

No matter how big or small the deal, it’s important for companies on both the buyer and seller sides to understand the chronological steps of the M&A process. 

What are Mergers and Acquisitions?

The term mergers and acquisitions (M&A) refers to business transactions where businesses combine (merge); one business purchases another; or one business purchases specific assets from another business. M&A transactions may also involve an individual purchasing an existing business. 

From startups, mom and pop shops, to well-established corporations, companies of all sizes engage in mergers and acquisitions. The M&A process offers certain pros and cons for both the buyer and seller. 

Companies may pursue an M&A for various reasons, including opportunities to scale, wiping out the competition, or selling to a bigger company. 

Mergers vs. Acquisitions 

Mergers happen when 2 companies seek to form a partnership and join forces for the greater good. These types of M&A transactions typically occur with companies of similar size and who operate in the same industry. When 2 companies merge, it is done on common ground and mutually agreed on before they become equal partners in the new joint venture. 

In 2008, Sirius Satellite Radio joined forces with rival XM Satellite Radio to create Sirius XM. Since these two companies were alone in the satellite radio world, merging allowed them to limit competition, and both reap the market benefits. 

Acquisitions often occur among competing companies in the same or similar industries. The larger of the 2 companies may buy the smaller company and integrate operations, reducing competition while simultaneously growing; or vice versa. 

An individual interested in seeking to go into business for themselves may also acquire an existing company instead of creating their own.

In 2016, Microsoft acquired LinkedIn for $26.2 billion after competing with Salesforce.com to close the deal. Acquiring LinkedIn allowed Microsoft to reach a much more massive user base on one of the world’s most successful social networks. 

Both processes are virtually the same, but the strategies used and the relationships between the companies can differ depending on a merger vs. an acquisition. 

What is Mergers and Acquisitions

How Long Does the M&A Process Take?

As the saying goes, “Rome wasn’t built in a day.” Anyone who has ever been a part of a merger or acquisition knows this to be true. 

The time frame can vary depending on the deal’s complexity, ranging from 6 months to several years before the deal is closed. Because the timeline is so long, unexpected obstacles can often occur—for example, what if a key employee leaves or an unforeseen circumstance like COVID-19 changes the business’s profitability?

“If you’re a buyer, seller, or you’re merging 2 companies together. You need to understand that this is a big project,” says M&A attorney Michael Brandwein. “This may be the burgeoning of a new enterprise so look at it as months and not days and weeks.”

Most mergers and acquisitions may include a draft of the potential timeline, but it is highly recommended to leave room for any unforeseen circumstances that may come up. 

Motives for Mergers and Acquisitions

A company may decide to merge with a company or acquire a new one for a variety of reasons, including the following: 

Tax Benefits

Merging or acquiring a company can come with tax benefits, but this isn’t usually the driving factor behind an M&A deal. 

One of the first steps in the M&A transaction should be understanding the tax considerations this move can have on your business. 

In some cases, these implications may allow a company to lower the amount of taxes its responsible for paying, while in other instances you may find yourself on a first-name basis with the IRS. 

Increased Growth 

The opportunity to increase growth is one of the driving factors behind all M&A transactions. By merging or acquiring another company, it’s expected that an increase in revenue and income can be quickly attainable. 

In 2005, Google purchased Android for $50 million. Google saw potential in the startup and an early opportunity for a major growth initiative in smartphone technology. 

Synergies

Synergy is the concept that 2 companies are worth more combined than they are separate. Buyers and sellers must understand potential synergies when approaching a merger and acquisition. 

Synergies can arise due to cost reduction or increased revenue because of the merging of the 2 companies. 

The most common types of synergies are:

  • Cost synergies
  • Revenue synergies
  • Financial synergies

Synergies are one of the most important aspects of merger and acquisition transactions and should be carefully considered when selling or buying a business.

In 1998, Exxon and Mobil the top two oil companies in the United States formed a marriage which at the time was the biggest merger of its time at a record $75.3 billion. Since then, Exxon-Mobil has seen continued growth since joining forces remaining the top U.S. oil company.

Diversification 

Diversification is another common motivating factor in M&A deals. This occurs when a company can move into different areas of operation. 

AT&T, one of the country’s most popular phone companies, merging with cable company Time Warner, is a clear example of a company diversifying its operations to increase revenue. 

Types of Mergers & Acquisitions 

There are several methods businesses can use to expand nationally or internationally. The motives behind the deal will help you establish which of these methods is best for you. 

The most common types of mergers and acquisitions are:

  • Horizontal merger
  • Vertical merger
  • Reverse merger
  • Conglomeration merger

Horizontal Merger 

A horizontal merger happens when 2 companies operate in the same industry and offer similar products or services. This strategy works best for companies that want to scale and increase their market power. The goal of a horizontal merger is to create value by combining the 2 companies. 

In 2015, the Kraft Foods Group merged with H.J. Heinz Co to form the Kraft-Heinz company. At the time, the deal was expected to make it the 5th largest food company in the world and the 3rd largest in the US. Merging removed direct competition and brought value to both companies. 

Vertical Merger 

Vertical mergers typically involve 2 companies with different services or products and combine supply chains to extend business capabilities. This type of merger is used to streamline operations, cut costs, and increase efficiency.

One of the most famous examples of a vertical merger happened in 2006 when Walt Disney acquired Pixar Animation Studios. This merger is accredited as one of the driving factors in Disney’s continued success to date. At the time, Disney’s animation department was failing; partnering with Pixar was the spark the company needed.

Reverse Merger 

The reverse merger method allows smaller private companies to go public while avoiding the time-consuming and expensive process of a conventional IPO. Reverse mergers are ideal for companies who are looking to drastically expand their reach from thousands to millions.

In 2013, Metro PCS agreed to merge with T-Mobile USA through a reverse merger. Metro PCS operated mainly in the pre-paid cellular market; this allowed T-Mobile to increase cost synergies by solidifying its presence in the pre-paid market and decreasing competition with larger cellular companies.

Conglomerate Merger

A conglomerate merger occurs between 2 companies involved in different industries. Companies may be motivated to enter a conglomerate merger to diversify their revenue streams, increase market share, and sell their products. 

In 2017, Amazon entered the brick-and-mortar grocery store business by acquiring Whole Foods for $13.4 billion. This allowed Amazon to expand its footprint very quickly to physical stores all around the country. It also allowed Amazon to offer delivery of Whole Foods groceries.

What’s the Role of an M&A Lawyer?

As mergers and acquisitions lawyers, we wear a lot of hats during M&A transactions. A deal can fall through quickly if all the right boxes aren’t checked from start to finish. 

The M&A lawyer’s primary responsibilities are:

  • Performing due diligence
  • Advising on regulatory requirements
  • Preparing the necessary documentation
    • Letter of Intent (LOI)
    • Non-Disclosure Agreement (NDA)
  • Advising their client through the completion of the transaction 

Our role as M&A lawyers is to assist you from start to finish. Our job is to have those uncomfortable conversations and ensure all the deal terms are agreed upon. We highly recommend consulting with an attorney before beginning the M&A process. 

We Can Help with your M&A Deal! 

Our mergers and acquisitions lawyers are ready to ensure your business deal closes on the best terms for you.

Whether you’re buying or selling a business, you need a strong negotiator on your side with a robust knowledge of corporate lawcontract law, and tax law to maximize your M&A benefits.

Let our experienced team of attorneys provide you with the knowledge to maximize your profits every step of the way.

Contact Gordon Law Group

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