A Look at the Merger & Acquisition Process
Dec. 7, 2022
Following the pandemic and lockdowns in 2020, merger and acquisition (M&A) activity grew across the U.S. and the globe in 2021, not only in value but in volume. In fact, deal value in M&A activity reached $5.9 trillion, setting a record. The Minneapolis-St. Paul area also saw growth, with the highest level of activity since 2000.
There are generally two players in an M&A transaction – the acquiring company and the target company. In a merger, the two companies become one, while in an acquisition, the target company is absorbed into the acquirer’s orbit.
M&A can take months or years to complete and require several steps on both acquirer and the target company to ensure everything goes smoothly and everyone ends up with what they were promised.
If you and your business are looking to enter the M&A market, or you’re already in the process of merging with or acquiring another business in or around the cities of Minneapolis and St. Paul, contact the Engel Professional Association.
With more than 20 years of experience in business law, we have advised and guided many in the M&A process. Contact us today if you’re entering or about to enter the M&A marketplace. We proudly serve clients across Minnesota, including Mankato, Maple Grove, St. Cloud, and Woodbury.
Understanding Mergers and Acquisitions
Sometimes the words merger and acquisition are used interchangeably, but that is not actually the case in the real world of M&A.
A merger involves two companies combining to form an entirely new business entity. Each party shares the ownership of the new company while the two previous companies are dissolved. A new management team is put into place as well. Typically, a merger is mutually agreed upon and can be friendlier than an acquisition.
An acquisition involves the absorption of one company by another, but no new entity is created. You sometimes hear the phrase “hostile takeover” when one company uses its resources to acquire another company. That phrase refers to an acquisition that the target company is fighting to stay independent. Not all acquisitions are hostile, however.
One frequent form of acquisition is by financial institutions such as private equity firms that seek to own, but not directly operate, the target of acquisition.
Types of Mergers
There are generally considered to be five basic types of M&A – horizontal, vertical, concentric (or congeneric), market-extension or product-extension, and conglomerate:
HORIZONTAL MERGER: This type occurs when two entities in the same market join forces to dominate market share.
VERTICAL MERGER: Two entities in the same market but in different stages of production combine; for example, one may be a retailer and the other a manufacturer.
CONCENTRIC MERGER: The acquirer and target company offer different products or services within the same market and decide to merge to increase market share.
MARKET-EXTENSION OR PRODUCT-EXTENSION MERGER: Two companies in the same industry merge to expand market reach or to add products to their portfolio.
CONGLOMERATE MERGER: This occurs when two entities whose business activities and industries are totally unrelated decide to merge.
The M&A Process
Before you embark on a merger or acquisition, you must consider several factors. One major factor, of course, is what you’re seeking and how the merger or acquisition will benefit you. Once you’ve decided on the direction you want to take, you need to consider:
FINANCING: An acquiring entity has two major options for purchasing or taking over another company – a stock purchase or an asset purchase. In a stock purchase, you buy up the target’s shares. In an asset purchase, you buy all the assets of the target. There are, of course, other means of acquiring a company, including cash, exchanging stock, loans and lines of credit, debt acquisition, and initial public offerings.
THE BUSINESS STRUCTURE ANTICIPATED: Will you merge into a single, new entity or just acquire the other business? Who will run the resulting business or businesses? You need to have a plan in place.
LAWS AND COMPLIANCE: Federal, state, and local statutes, regulations, and restrictions have to be taken into consideration. These can range from health and safety issues all the way up to antitrust violations. Other compliance areas to consider include financial and contractual obligations.
MARKET CONDITIONS: Research trends in your industry to determine if the deal you envision is going to bring you the results you anticipate.
Exercise Due Diligence
There’s a reason M&A can take months or even years to complete. You have to be sure that what you’re acquiring or merging with is everything it claims to be. You will need to pour through financial statements, internal documents and records, tax filings, debts, leases, employee contracts, impending lawsuits, and more.
The due diligence process begins with signing a letter of intent to acquire the target entity. The buyer then assembles a team to conduct the research necessary. The team will generally include professionals from the legal and financial fields with experience in M&A, along with others, including consultants and potential investors.
A major goal of due diligence is to uncover anything that may be a problem with the M&A. However, even after you’ve successfully merged or acquired another company, there are still potential pitfalls that can slow the process or even cause the whole transaction to hinge on being unworkable.
For instance, the two companies’ cultures may clash, and on top of that, you may choose the wrong leadership team. If you have shareholders whom you promised unrealistic returns, you may have to deal with rumblings from them. Also, you need to make sure you put in place all the legal protections you need should something go wrong.
Seek Trusted Legal Counsel
This brief overview highlights many of the main issues involved in M&A, but once you embark on the process, you’ll find how challenging it can be. You’re going to need guidance and advice on several fronts. Your letter of intent can trap you into something you can’t get out of if not crafted correctly. The same holds true for your final merger and acquisition purchase agreement.
If you are in the Minneapolis and St. Paul, Minnesota, area, rely on the business and legal experience of the Engel Professional Association for all your M&A concerns and needs. Seeking an acquisition or merger is not something you really want to try on your own. We’re ready to help, just as we have with many other businesses and their M&A goals.