Mergers & Acquisitions Law
Mergers and acquisitions law covers the rules companies must follow when they join forces with another business or purchase another business. In the simplest terms, a merger is a combination of more or less equals, while an acquisition is the purchase of a smaller company by a larger company. In a merger, a new company is formed; in an acquisition, the smaller company typically becomes a division or a subsidiary of the larger company.
A full discussion of all the business, tax, and antitrust implications of a merger or acquisition is beyond the scope of this discussion. The following is a broad overview. Anyone considering a merger or acquisition should consult an attorney with experience in mergers and acquisitions.
Mergers and acquisitions were hugely popular in the 1990s but their popularity has waned in recent years because many of the mergers and acquisitions haven't work out as planned. The failures were not because mergers and acquisitions are bad ideas, but because mergers and acquisitions were often undertaken for the wrong reason.
Companies under pressure to grow, to improve the bottom line, or to improve shareholder value have two options. They can pursue organic growth, which means selling more product or services, or they can grow by acquiring other companies. Although most companies pursued organic growth, they soon discovered that growth by acquisition was far easier to achieve. And so the acquisition race was on.
Mergers and acquisitions undertaken for the right reasons can achieve positive results. They may produce cost savings if the combining companies are able to reduce payroll by sharing resources, such as by combining the human resources, accounting, or marketing departments. The merger or acquisition may give one of the companies access to a resource it lacked, such as cash or other liquid assets, or it may give one of the companies access to customers, markets, technology, or employees with certain skill sets it didn't have before.
Mergers and acquisitions undertaken merely to create growth can turn sour. They can create duplication of effort rather than cost savings. They can create new troubles for the acquiring company if it doesn't really understand the business or the business culture of the acquired company. An important factor in the success of any merger or acquisition is the compatibility of the two management teams and the two work environments. Mergers and acquisitions that look ideal on paper won't work if there isn't sufficient compatibility between the two companies.
Mergers. In the standard merger approach, two companies join forces to form a single company. The new company's name could be a combination of the two names or it could be an entirely new name. Once both boards of directors approve the merger, it needs to be approved by at least two-thirds of both stockholders. The stockholders of the merged company are issued stock in the new company to replace their stock in the old companies.
Anti-trust. Where a merger poses anti-competitive risks, the Federal Trade Commission will get involved. The Clayton Act, a federal law, gives the FTC the authority to investigate mergers that may "substantially lessen competition" or "tend to create a monopoly." The FTC's authority in merger cases is shared at the federal level with the Antitrust Division of the Department of Labor.
Another federal law, the Hart-Scott-Rodino Act, requires companies that are considering a merger and that meet certain statutory thresholds to provide information to the FTC and then to wait for the FTC's response. Most reports filed under this law don't present any anti-trust concerns and proceed ahead without FTC involvement. A small percentage of filings, generally well under 5%, result in a full FTC investigation.
In general, the FTC has been more willing to investigate horizontal mergers - those, for example, between competitors - than vertical mergers - those, for example, between a manufacturer and a distributor. If it wants to stop a proposed merger, the FTC will generally file an action in federal court seeking a preliminary injunction. It can also issue a cease and desist order where it believes that violations of the Clayton Act have occurred.
Foreign mergers. Mergers between a U.S. company and a foreign company create additional regulatory demands. In most cases, the foreign country's regulators must also approve the merger. Cross-border mergers also trigger various business considerations, including different cultures and possibly different rules on corporate governance and financial reporting.
Acquisitions. One of the first pieces of information that any company considering an acquisition will want to know is the value of the other company. What is it worth? There are many different ways to measure a company's value. One way is to estimate the return the purchasing company could expect on the investment. Another way is to compare the purchased company's return on its assets with other companies in the same industry. Other methods include determining how much of a loan the purchased company's cash flow would support, valuing its tangible assets, or using industry yardsticks, such as one that says that a company is worth $x per subscriber.
Structuring the deal. Once the price range is determined, another consideration is how the deal is to be structured. Will the purchasing company pay cash? Will the merging companies swap stock?
A critical concern for any party involved in a merger or acquisition is the other party's liabilities and potential liabilities. The last thing that a purchasing company wants to do is buy a company with significant potential liabilities.
One approach is to buy the company's assets but not its liabilities. There are a number of issues raised by an asset purchase that an acquiring company should discuss with a mergers and acquisitions attorney before proceeding.
Another approach is to buy a company's stock. In this approach, the purchasing company buys the stock from the purchased company's stockholders. The purchasing company will typically offer the stockholders a price in excess of the listed price in order to induce them to sell. If the purchase is undertaken without approval from the target company's management, it is called a hostile takeover. As with the asset purchase, there are a number of issues raised by a stock purchase that should be discussed with an attorney.