The world of business and finance can be really confusing. The processes are complex. And as if that’s not enough, the jargon is much difficult to quickly understand, especially when it comes to companies’ mergers and acquisitions. Check out these terminologies and get familiar with the workings of the business world.
In a merger, the boards of directors for two companies approve the combination and seek shareholders’s approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company.
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its legal structure. An example of this kind of transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, where the two companies preserved their names and organizational structures.
A consolidation creates a new company. Stockholders of both companies must approve the consolidation, and subsequent to the approval, they receive common equity shares in the new firm. An example of this is 1998’s Citicorp and Traveler’s Insurance Group announcement of a consolidation, which resulted in a new company called Citigroup.
In a tender offer, one company offers to buy 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.
While the acquiring company may continue to exist, particularly if there are certain dissenting shareholders, most tender offers end up in mergers.
Acquisition of Assets
When it comes to a purchase 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 normal during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon final transfer of assets to then acquiring firms.
When it comes to a management acquisition, which is also known as management-led buyout, the executives of a company buy a controlling stake in another company, turning it into a private firm.
Usually, these former executives partner with the financier or former corporate officers in order to help fund a transaction. Such a M&A transaction is normally financed disproportionately with debt, and the majority of shareholders much give the go signal to it.
Varieties of Mergers
In terms of business structures, there is a whole bunch of different mergers. Here are a few of them:
- Horizontal mergers – two companies that are in direct competition and share the same product lines and markets.
- Vertical mergers – a customer and company or supplier and company.
- Congeneric mergers – two businesses that serve that same consumer base in different ways, like a TV manufacturer and a cable company.
- Market-extension mergers – two companies that sell the same products in different markets.
- Product-extension mergers – two companies selling different but related products in the same market.
- Conglomeration – two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Every one of them has specific implications for companies and investors.
- Purchase Mergers – this kind of merger takes place when one company buys another company.
- Consolidation mergers – with this merger, a brand new company is formed and both companies are bought and combined under the new entity.