Mergers and acquisitions is a huge area of practice in most commercial law firms and can see solicitors representing some of the world’s largest corporations on deals worth billions of pounds. Make sure your commercial awareness
is up to scratch by learning about this topic.
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:
- Remove competition
- Obtain human capital and customer bases
- Acquire new product lines and intellectual property
- Cost synergies in marketing, research and development
Challenges of horizontal mergers:
- Competition regulators argue that horizontal integration can result in a monopoly where one company dominates the market
- It can result in integration difficulties, specially where the target company’s management is retained as part of the deal
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:
- More efficient supply chain
- Managerial synergy, meaning less efficient management will be replaced
- Cost control whereby management can cut out excess production and distribution steps
- Quality control, whereby companies can monitor production more closely
Challenges of vertical mergers:
- Disparate Corporate Structures may cause inefficiencies or an unhappy/unproductive workforce
- Competition/Antitrust regulators may give the company bad press. Often, vertical mergers are criticised as they could be used to block competitors from completing certain stages within a supply chain, in turn reducing market competition
- Higher organisational costs
- The deal may not include existing management at one of the companies, meaning there may be key skilled and experienced personnel loss
Other Types Of Mergers And Acquisitions
Other M&A classes include:
- Congeneric mergers, which describes when two companies are in the same or related industries or markets but do not offer the same products. They may share similar distribution channels, providing synergies for the merger.
- Conglomeration mergers, which is when companies merge that have no common business areas. Examples include Amazon, Alphabet (Google’s parent company), Procter & Gamble, Unilever, Diageo, Johnson & Johnson and Warner Media. All of these companies own many subsidiaries over a diversified portfolio. Amazon is the best example with more than 40 subsidiaries such as grocery store Whole Foods, home security system Ring and television production studio MGM.
- Purchase merger, which is when the company that is bought acquires the name of the purchaser.
- Consolidation merger, which is when two companies merge to form a brand-new company.
- Product-extension mergers, which is when two businesses that deal in products related to each other and operate in the same market merge in order to group products together and access more consumers.
- Market-extension mergers, which is when companies that produce or sell the same type of product but to different markets merge.
Timeline Of An M&A Deal
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.
Step 1: Due Diligence
This involves looking into the merged acquisition/merger target. The following documents should be considered:
- What long-term contracts has the company agreed with customers?
- What long term-contracts has the company agreed with suppliers?
- Does the company have any pending litigation?
- How is the company set-up in its composition?
- Has the company breached the law at any point?
- What human rights policies does the company have in place?
- How does the company address anti-bribery and whistle-blower cases?
- What has the company does to observe data protection?
- What expertise lies within the existing management team? Do these individuals have non-compete clauses in their employment contracts?
- Are the employees unionised?
- What pension commitments dos the company have?
- Does the company have a long-term lease or the right to occupy premises such as warehouses, factories, and offices? Will these be included in the deal?
Generally speaking, due diligence ensures that both parties know about any problem or cost they may face in the future.
Step 2: Protection
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.
Step 3: Motivations
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.
Wider Mergers & Acquisitions Reading