If your company is looking to grow through a merger or acquisition, or your private company is preparing to be bought out by another company, there are a few steps to take.

This article covers important considerations for mergers and acquisitions including a description of what mergers and acquisitions are and different types of acquisitions. It also describes the difference between the two companies involved in the exchange, the buyer and seller.

Lastly, this article describes the process and steps that two firms (buyer and seller) should take before becoming one company. 

Review the mergers and acquisitions guide below for a step-by-step understanding of the acquisition process.

What are Mergers and Acquisitions

Traditionally, mergers and acquisitions are financial transactions that companies take to grow market share, where they combine to form a new, larger organization.

This means that a company takes ownership of daily and long-term decision making, and operations. Most often, a large company (often publicly traded companies) choose to target companies that are smaller (usually private companies) for a merger.

The target company’s intellectual property is valuable or offers financial value that exceeds the acquiring company’s costs to acquire.

  • Mergers are when companies or two firms combine to become a new entity entirely.
  • Acquisitions are when a larger company takes ownership of a smaller company for a previously established purchase price.

Both mergers and acquisitions can be savvy financial decisions and are often seen as long-term investments that promote growth, corporate development, offer tax benefits or grow stock prices.

The board of directors typically does research and due diligence to identify related companies in the same or similar industries that can increase their working capital, provide a beneficial element to the supply chain, or simply grow cash flow.

We see tons of this type of transaction on wall street.

Often the terms merger and acquisition are used interchangeably.

The general transaction is called a merger. A merger occurs when one company is selling its assets or intellectual property to another business or developing a new entity entirely. This usually grows financial value and the number of shares available, which pleases shareholders.

Target Company vs. Acquiring Company

In the merger and acquisition process, the target company is the ‘seller’ or the company being purchased.

The acquiring company is the company that is offering the deal to another company (usually smaller) to buy it.

The buyer evaluates the target business including its management practices, corporate development program, and any previous offers (through due diligence.)

Target companies work with companies ready for acquisition to make a reasonable merger deal.

Types of Mergers

There are a few different types of mergers.

Mergers are when one company chooses to purchase another business. This can increase the acquiring company’s current value.

Horizontal Merger

When two companies produce or sell the same product, the merger is called a horizontal merger. This is good for both businesses because the deal helps each reduce competition in the industry. In this scenario, there is not necessarily a buyer and seller, rather two firms become one firm.

The horizontal merger eases demand on the supply chain for the specific product and impacts market share for that industry. Companies can work together to improve product lines and expand audience reach.

It is a good financial decision for both organizations since there is not a purchase, but both businesses grow in value. As long as the company’s shareholders are in favor of the transaction, and the deal process is simple, these types of mergers tend to be very successful.

Horizontal Integration

The term horizontal integration refers to a merger between two businesses that are equivalent in value. Two companies that are even in cash flow, have similar working capital, or private equity, make for successful mergers.

Vertical Integration

If two companies have very disparate valuations, the merger is considered vertical.

In this case, usually, one larger company identifies target companies that are subsectors of the same industry, offer similar products, or reach a related audience.

Vertical integration is a smart financial decision for the larger business because the value of the acquiring company will grow significantly, as will stock price.

The target company can benefit because they are completely relieved of risk and typically make a profit through the transaction.

A company’s board of directors should determine if the merger makes sense before agreeing to the deal. The target company should also take care to run a host of due diligence and research, often with the support of a specialty consulting firm with experience in mergers and acquisitions.

This research will include:

  • Valuation of future cash flows
  • Reviews with an investment banking firm or specialty consulting team
  • Purchase price
  • Agreement of shareholders
  • Transaction prices across the supply chain
  • Obtaining offers from another company
  • Consider tender offers

Due diligence is possibly the most important step a business should take before embarking on a merger and acquisition. A company may not get the most value or highest purchase price for their assets without this step.

It’s a good idea to work with a company’s management team, especially a private company, before being bought by another company through a merger.

Hostile Takeovers

This type of merger is when the acquiring company bypasses the target company and goes directly to shareholders for approval. The idea is that the acquiring company will replace the management team, and takeover the target company completely, assets included.

By working with a specialty consulting firm the acquiring company (buyer) can get strategic advice before the hostile takeover takes place. This will help the buyer formulate an appropriate approach and price to entice the target company’s shareholders effectively. 

If the merger transaction can be hosted peacefully, the target company may offer a better purchase price, especially by working with an investment banking team. This will alleviate debt through private equity.

Asset Purchase

In a merger and acquisition deal surrounding asset purchase, the target company’s intellectual property is sought out by a buyer. This could also be the purchase of property, equipment, tools, supply chain control, or other parts of the product creation process.

The price of the sale will be determined by the seller, but often the buyer makes an offer aligned with their own business value, suspected growth, based on advice of an investment banking team.

The asset purchase deal process can be simple with specialty consulting services.

Guide to Mergers

Whether you’re looking to make a deal with a private company or received an offer as a target company, this guide to mergers and acquisitions gives a brief rundown of the merger or acquisition process.

  1. The acquiring company evaluates the market for a financially savvy purchase.
  2. Shareholders and management teams review product lines of target companies.
  3. Financial value of mergers and acquisitions are established.
  4. Value of assets is identified.
  5. Companies work with a corporate development team (like Hunter Stevens LLC) to create a fair deal.
  6. Acquiring business proposes a price.
  7. If the target business accepts, the deal is finalized.

Final Thoughts: Mergers, Acquisitions, and More

Mergers and acquisitions take time.

Two companies that wish to explore a possible merger or acquisition should work with specialty consulting companies like Hunter Stevens LLC to target the right companies that will lead to increased value, financial gains, greater stock value, and a simple purchase transaction. When you’re ready to bring your target company to market, the Hunter Stevens team can help you pursue a merger or acquisition transaction.