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Mergers and acquisitions (or M&A) is an umbrella term which refers, in general terms, to the combination of two or more corporate entities. It may seem deceptively simple but in reality there are lots of different types or ways to finance a merger or an acquisition.
Merger: Combination of two firms, which subsequently form a new legal entity
Acquisition: Where one company purchases another company
The main benefit or a merger or acquisition is to accelerate growth. The two merged companies will be able to reply on resources from both, which can be used to market new products. However, the main drawback to a merger or acquisition is if there is a loss of efficiency – whether this is financial, managerial or operational.
Most types of M&A transactions can be deemed as horizontal or vertical.
A horizontal merger is when two companies that are in direct competition over product lines and the same market choose to merge. Examples include Facebook’s 2012 $1 billion purchase of rival Instagram and Exxon and Mobil’s 1998 $75.3 billion merger.
Benefits of horizontal mergers:
Challenges of horizontal mergers:
A vertical merger is when two companies who operate in the same market but at different product level in the same supply chain choose to merge. The most famous vertical merger is that of eBay and PayPal in 2002. Another example is entertainment venue owner and operator LiveNation’s vertical acquisition of ticket retailer Ticketmaster.
Benefits of vertical mergers:
Challenges of vertical mergers:
Other M&A classes include:
Solicitors are tasked with performing due diligence for their client, when involved in a merger or acquisition. With millions, if not billions of pounds on the line, it is integral for all parties to know what they are entering into. Here is a skeleton guide of the work that must be completed by law firms on behalf of their clients.
This involves looking into the merged acquisition/merger target. The following documents should be considered:
Generally speaking, due diligence ensures that both parties know about any problem or cost they may face in the future.
This involves briefing the client on any issues uncovered during due diligence and ensuring provisions are made for this in any future deal.
For example, a buyer may include a clause stipulating that any litigation fees will be covered by the seller, if there is an existing dispute. Similarly, a seller may request that the buyer upholds enhanced redundancy rights or retains the current management team.
The buyer will often include a non-compete clause which prevents the target company’s experts from working in the same field or industry for a certain period of time, to prevent the set-up of a rival company.
Here, the law firm and client should consider the motivations of both parties: why is the company buying or selling?
If selling, often a company might urgently need money. This will put the buyer in a stronger negotiating position. Companies may also choose to sell as part of a logistics decision. For example, they may be disposing of assets which are a non-core part of their group. Similarly, the company may have decided to outsource part of its supply chain.
When it comes to buying, if it’s a private equity house, the objective is transparent: to make money. However, PE’s often ruthless approach may deter some sellers who wish for their company to remain in one piece. If the buying company is a corporation, motivations could include logistical reasons such as supply chain efficiencies or competition elimination.
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