Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. The term M&A also refers to the desks at financial institutions that deal in such activity.
1. The Essence of Merger
The terms “mergers” and “acquisitions” are often used interchangeably, although in actuality, they hold slightly different meanings. When one company takes over another entity, and establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer absorbs the business, and the buyer’s stock continues to be traded, while the target company’s stock ceases to trade.
On the other hand, a merger describes two firms of approximately the same size, who join forces to move forward as a single new entity, rather than remain separately owned and operated. This action is known as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is issued in its place. Case in point: both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was created. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies.
2. The Action of Acquisition
Unfriendly deals, where target companies do not wish to be purchased, are always regarded as acquisitions. Therefore, a purchasing deal is classified as a merger or an acquisition, based on whether the purchase is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company’s board of directors, employees and shareholders.
In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. Post merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers and Compaq, whereby Compaq absorbed Digital Computers.
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its legal structure. An example of this transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures.
Consolidation creates a new company. Stockholders of both companies must approve the consolidation. Subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998, Citicorp and Traveler’s Insurance Group announced a consolidation, which resulted in Citigroup.
In a tender offer, one company offers to purchase the outstanding stock of the other firm, at a specific price. The acquiring company communicates the offer directly to the other company’s shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist — especially if there are certain dissenting shareholders — most tender offers result in mergers.
Acquisition of Assets
In an acquisition of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.
In a management acquisition, also known as a management-led buyout (MBO), a company’s executives purchase a controlling stake in another company, making it private. These former executives often partner with a financier or former corporate officers, in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its chief executive manager, Michael Dell.