Mergers + Acquisitions Basics

There are many strategic and financial reasons for buying or selling a company or portfolio of companies. A buyer may be looking to grow an existing business, diversify in new markets or geographical locations, increase its customer base, acquire new employees with specific expertise, acquire equipment, intellectual property or real estate, integrate its supply chain, realize cost-savings through economies of scale, or buy out the competition. On the other hand, a seller may be looking to raise capital for other projects or purchases or leave the market entirely.

 Mergers and acquisitions are sophisticated, complex transactions which are as varied as the companies involved in the transaction. For that reason, this article provides an overview of the basic elements of these types of transactions.

A merger is a business transaction in which two or more companies are combined into one new entity.

In an acquisition, one company buys another company which then becomes a subsidiary or division of the purchasing company. Three common types of acquisitions are horizontal, vertical, and conglomerate acquisitions. In a horizontal acquisition, one company buys another company in the same business. In a vertical acquisition, one company buys another company in its supply or distribution chain. In a conglomerate acquisition, one company buys another company in a completely different business.

Before engaging in the sale or purchase of a company, it is important to define the buyer’s or seller’s strategic and financial goals and objectives and to hire any necessary third parties, such as investment bankers, legal counsel, and financial advisors, to help the company identify and implement the steps that need to be taken to realize the company’s goals and objectives.

A buyer looking for companies to purchase will need to do market research and target potential sellers if the buyer does not already have a target in mind. Once a target or targets are identified, the buyer will need to investigate and evaluate the target to determine whether it meets the buyer’s strategic and financial objectives.

During this time, the buyer is looking at the financial health of the target, determining the financial value of the target, looking at financing options, assessing how difficult or complex it will be to integrate the target, determining how much time is needed to merge with or acquire the target, determining whether the target is a fit in terms of culture and values, evaluating tax implications of the transaction, identifying liability risks, and identifying regulatory compliance issues or concerns.

The buyer should determine how it wishes to structure the transaction before approaching the target. Will it be a merger or an acquisition? And if it is to be an acquisition, will the buyer be looking to acquire the assets or the stock of the target? There are many nuances in determining how to structure the transaction, and the buyer will want to work closely with legal counsel to determine the best way to move forward.

The buyer will need to determine the target’s monetary value or worth for the purpose of negotiating a fair purchase price. There are a wide variety of valuation methods and third-party consultants will likely be needed to determine the proper valuation method and perform the analysis.

Once the parties are in communication with another and interested in moving forward, they will negotiate the terms of a purchase and sale agreement. Among other things, they will need to agree on: (1) the purchase price based on the valuation (or competing valuations) of the target; (2) the deal structure; (3) the timing and scope of due diligence; (4) the timing of the sale, closing date, and closing location; (5) who will own the target’s liabilities; (6) regulatory compliance and approvals; (7) representations and warranties; (8) indemnification; (9) non-compete and non-solicitation; and (10) how to integrate the companies after closing.

The buyer will be given time under the parties’ agreement to conduct due diligence. Conducting due diligence is a cumbersome, complex process that is critical to the success of the transaction. During the due diligence period, the buyer will have access to the seller’s business records and information and will be able to engage third-party consultants to review that information and determine whether to go forward with the closing and/or whether additional contractual agreements are necessary.

There are a host of options for financing a merger or acquisition. For example, the buyer may have the ability to pay cash for the target or it may need to finance the transaction through institutional or private loans, bonds, leveraged buyouts, stock swaps, the issuance of new stock shares, through private equity financing, or some combination thereof. The parties’ financial ositions, the type of deal, the timing of the deal, interest rates and terms, regulatory restrictions, and each party’s goals and objections will influence the kind of financing best suited for each transaction. 

Depending on the types of companies involved and the structure of the deal, the parties may need to identify and address regulatory compliance issues. For example, they may need to obtain approval for the sale from federal agencies such as the Federal Trade Commission or the Department of Justice or they may need to comply with specific state or federal laws or regulations before or after closing. The buyer may also need to obtain necessary permits or get approval from local, state, or federal officials to transfer permits or other entitlements needed to operate the target. The parties will want to seek legal counsel to identify and timely address regulatory compliance issues.

The parties will close the transaction at a specific, pre-selected place and time once they have completed their due diligence, met all necessary conditions precedent to closing, and negotiated all required ancillary documents. At closing, the parties will exchange executed documents and the buyer will pay the purchase price.

If any real or personal property is exchanged in the transaction, the parties will record all deeds with the clerk and recorder where the property or properties are located and file all UCC-1 financing statements with the Secretary of State’s office where the debtor was incorporated or organized.

After the transaction is closed, the parties must work together as provided in their agreements to integrate the companies which are part of the merger or acquisition.

Our Corporate Group represents private companies, public companies, and private equity clients across all categories of participants in transactions, including buyers, sellers, stockholders, venture capitalists, lenders, financial advisors, management, founders, investors, and private equity funds. In addition, we serve as primary corporate counsel to numerous private and public companies, giving our group an unmatched perspective on market deal points.